Overview of recent activity
In early 2022 the recovery of the Italian economy after the covid-19 pandemics was hit by the effects of the Russian invasion of Ukraine, and in particular by the higher costs of energy deriving from, among other factors, the stoppage on the import of Russian gas and oil.
To address these issues, Italy approved an act on 14 July 2022. The measure in question, dubbed the Aid Decree, provides for a series of measures aimed on the one hand at containing energy prices and inflation for families and businesses, and on the other at achieving independence from Russian gas by boosting the renewable sector.
The Aid Decree contains measures totalling approximately €14 billion, derived without additional debt from increased taxation on the profits of energy companies.
Other measures are aimed at conveying the stock of the private savings of Italian families into investments in small to medium-sized companies leveraged on the tax exemptions for the benefit of holders of interests in specific vehicles complying with regulatory requirements. These vehicles are termed PIR-compliant (or simply PIRs), or personal savings plans. PIRs were first introduced in Italy in early 2017, and benefit from an exemption from the taxation of capital gains and dividend or coupon distributions – for which Italian tax law would ordinarily provide for a tax withholding of 26 or 12.5 per cent – in the case of investments in PIR by individuals.
The tax benefits of a PIR can be obtained through collective investment schemes (CISs) that comply with the regulatory provisions in terms of eligible financial instruments, maximum thresholds for blue chips, maximum amounts eligible to tax exemptions and the minimum duration of the investment. Until early 2020, the requirements for a PIR appeared to be designed mostly for purely retail investors so long as the tax exemptions for capital gains and distributions were available for investments not exceeding €30,000 per year and a total investment into the PIR of €150,000; an individual could only hold one PIR. As to eligible investments, a 2017 PIR had to invest at least 70 per cent of its assets in financial instruments – including those not traded on regulated markets or multilateral trading facilities – issued by or stipulated with Italian companies, or EU or EEA companies with a permanent establishment in Italy, not included in the FTSE MIB or the FTSE Mid Cap indices of the Italian Stock Exchange (Borsa Italiana) or equivalent foreign indices (2017 PIR assets).
However, in May 2020 Law Decree No. 34 of 19 May 2020, ratified by Parliament through Law No. 77 of 1 July 17 2020, introduced a new category of PIR – the AIF PIR – which is suitable for a more sophisticated audience because, in addition to investing in the 2017 PIR assets, the AIF PIR also has the option of investing at least 70 per cent of its assets in loans granted to companies issuing the 2017 PIR assets, as well as in credits of the same companies.
The 2020 asset class has systemic importance for the Italian economy so long as it adds to the eligible investments for PIRs the sources of financing for companies alternative to the banking channels, such as the granting of loans and the acquisition of company credits. In terms of ratios, the concentration constraint is raised to 20 per cent per issuer, while it was at 10 per cent for the 2017 PIRs.
The intermediaries that will be able to operate the new PIRs are, in addition to undertakings for collective investment in transferable securities (UCITS)-compliant open-ended CISs and insurance companies (life and capitalisation lines), European long-term investment funds (ELTIFs) and private equity, private debt and credit funds.
The maximum threshold for the tax benefits for AIF PIRs was also raised to €150,000 per year and €1.5 million for the entire PIR plan, and the same person may hold one 2017 PIR and one AIF PIR, meaning that the aggregate tax-exempt investment will be €180,000 per year and €1.65 million in total per person.
At the end of 2021, the total PIR-compliant assets under management (AUM) amounted to €22.7 billion.2
General introduction to the regulatory framework
The main piece of Italian legislation concerning financial instruments and services, including asset management and CISs, is the Legislative Decree No. 58 of 24 February 1998 (Consolidated Text of Rules on Finance) (TUF), as amended. The TUF is a statute issued by the government by delegation of Parliament. The TUF, in turn, delegates power to certain governmental and administrative bodies such as, without limitation, the National Commission for Companies and the Stock Exchange (CONSOB) and the Bank of Italy, in order to issue second-level regulations to implement the provisions of the TUF.
The TUF is periodically amended to implement the European Union (EU) directives applicable to the financial sector. Among the last material changes brought to the TUF are those contained in the Legislative Decree No. 191 of November 5, 2021 (LD 191), aiming at implementing at statutory level in the Italian legal system Directive (EU) 2019/1160 of the European Parliament and the Council of 20 June 2019 (known as the Cross-Border of Distribution of Funds Directive or CBDF) amending Directives 2009/65/EC (UCITS Directive) and 2011/61/EU (AIFMD) on the simplification of the cross-border distribution of CISs, including UCITS and AIFs.
In particular, LD 191 amended the TUF and mandated CONSOB to issue the relevant second-level rules as follows:
- Duties of CONSOB and the Bank of Italy: the information on the national rules applicable to cross-border distributions to be published on the websites of the national regulators, as required by Article 5.1 of Regulation (EU) 2019/1156, will be published on the websites of CONSOB and the Bank of Italy, according to the respective competences provided by the Italian law set out in Article 5 of the TUF: basically, the Bank of Italy for domestic undertakings for collective investment (UCIs) and CONSOB for foreign ones.
- Foreign UCITS: in relation to foreign UCITS, CONSOB will have to amend its regulations to discipline the ‘facilities’ set out by Article 92 of the UCITS Directive as amended by the CBDF. In particular, CONSOB will regulate the facilities for investors to be made available in Italy by EU UCITS, as provided for in Article 92 of Directive 2009/65/EC and, in particular:
- determine the tasks under the facilities for investors to ensure that investors can exercise their rights and have access to the information provided for in Article 92 of Directive 2009/65/EC;
- determine the language in which these facilities are to be provided; and
- regulate the conditions under which the tasks referred to in point (a) may be carried out by a third party or by the EU UCITS jointly with a third party.
Most likely the above exercise will be conducted by CONSOB by amending the provisions of its Issuers’ Regulation (Regulation 11971 of 1999, as amended – RE) governing the distribution of foreign UCITS, and will have to comply with the criteria of the CBDF, including, without limitation, the abolition of the current obligation provided by the Italian rules to have a paying agent and an investor relations manager established in Italy.
The cessation of the marketing of foreign UCITS in Italy must be preceded by a notification by the UCITS’ Home Member State (de-notification), according to the provisions of the UCITS Directive as amended by the CBDF and the formalities set out in the second-level rules to be issued by CONSOB.
It is worth noting that LD 191 does not address in any way the one-month prior notice concerning changes in the share classes marketed, set out by the new Paragraph 8 of Article 93 of the UCITS Directive as amended by the CBDF. Thus, it is expected that CONSOB will deal with this matter when amending the RE.
- Pre-marketing of alternative investment funds: the definition of pre-marketing in LD 191 is the same as that in Article 4.(1) (aea) of the AIFMD as amended by the CBDF, and the other requirements in terms of differences between pre-marketing and marketing also reflect those introduced by the CBDF. In connection with the pre-marketing of EU alternative investment funds (AIFs), CONSOB is informed by the Home Member State regulator, and CONSOB may ask the latter for additional information on the pre-marketing activities carried out or to be carried out in Italy.
In connection with the de-notification of AIFs, the rules provided by LD 191 are substantially the same as those provided for UCITS funds.
- Other provisions of LD 191: the other provisions of LD 191 concern changes to the rules on European venture capital funds and European social entrepreneurship funds introduced by the CBDF and the update of the rules of the TUF on sanctions for breach of the new rules deriving from the CBDF.
At the time of writing, CONSOB still has not issued the new version of the RE with the second-level provisions for the implementation of the CBDF.
Article 39 of the TUF delegates the Minister of Economy and Finance (MEF) to issue second-level rules determining the different types of Italian CISs based on the type of assets in which they can invest – that is, the closed-ended or open-ended type – and the authorised participants. In exercising such delegation, the MEF issued Ministerial Decree No. 30 of 15 March 2015 (2015 MEF Decree) concerning the general criteria applicable to the Italian CIS.
The 2015 MEF Decree (Article 14, Paragraph 2) provides for the following types of Italian CIS:
- Italian open-ended AIFs (non-harmonised CISs that can invest up to 20 per cent in unlisted financial instruments), which may be available also to retail investors and called non-reserved;
- Italian closed-ended AIFs (a structure that is required to invest in real estate, loans and other assets for which there is a market and their value can be measured at least every six months);
- Italian real estate AIFs (a category of closed-ended AIFs); and
- Italian reserved AIFs, for which the Italian rules do not provide requirements as to the eligible assets.
The term reserved means that this category of AIFs is only available to the categories of investors mentioned in the 2015 MEF Decree, which are either professional investors – as defined in the MiFID and its national implementing regulations; or, if allowed by the relevant AIF rules, non-professional investors investing at least €500,000 (in cash, one-off payment, no commitment).
The MEF Decree No. 19/2022 (2022 MEF Decree), which entered into force on 30 March 2022, has introduced an additional class of non-professional investors in reserved AIFs by adding two new sub-paragraphs to the above-mentioned Article 14, Paragraph 2 of the 2015 MEF Decree.
These two new classes are:
- non-professional investors in reserved AIFs who, as a result of a recommendation given by an authorised intermediary in the context of the service of investment advice, subscribe or purchase units or shares of an AIF for an initial amount of no less than €100,000, provided that, following that subscription or purchase, the total amount of the investments in reserved AIFs does not exceed 10 per cent of the overall financial portfolio (cash, financial insurance products, other financial products) kept with all the financial intermediaries by the relevant non-professional investors in a reserved AIF. The minimum initial shareholding is not fractionable; and
- entities authorised to provide portfolio management services that, in the context of that service, subscribe or purchase units or shares of the AIF for an initial amount of no less than €100,000 on behalf of the non-professional investors in a reserved AIF of which they manage the investment portfolio.
To actually administer the verification of the 10 per cent limit set out in (a) above, the 2022 MEF Decree provides for an obligation of the relevant non-professional investor in the reserved AIF to give to the relevant intermediary complete information on his or her financial investments.
It is important to note that the 2022 MEF Decree did not lower the €500,000 threshold for being treated as professional investors for the purpose of the marketing of AIFs, but introduced a new class of non-professional investor in reserved AIFs that can invest €100,000 provided that this is done within the scope of an investment service that implies a prior assessment of suitability – i.e., non-discretionary investment advice or management of investment portfolios on a discretionary basis – and that the 10 per cent threshold is complied with in cases of investments within the scope of investment advisory services.
Therefore, for the investments outside the scope of investment advice or portfolio management, the minimum €500,000 threshold remains unchanged.
With regard to foreign AIFs that intend to use this additional option for distributing to retail investors, it is expected that CONSOB will recommend the clear explanation of the distribution formalities in the notification letter found under Article 32 of the AIFMD, including, without limitation, the context of the advisory or portfolio management services in which the €100,000 investment can be made and the 10 per cent limit in the case of investment advice.
Common asset management structures
As regards UCITS funds, the 2015 MEF Decree expressly states that they can only be organised as either contractual, unincorporated mutual investment funds (FCIs) or as SICAVs, which are legal persons.
As for AIFs open to retail investors, called non-reserved AIFs (see Section II.ii), they can be open-ended where they invest in listed financial instruments, unlisted financial instruments (up to 20 per cent of their portfolio – see Section II) or cash deposits. It should be noted that following the implementation of the AIFMD, the definition of an open-ended CIS has been broadened to include all CISs for which the redemption of units or shares can be obtained with the ‘procedures and the frequency’ provided for by the CIS offering or constitutional documents, or both (Article 9 of the MEF Decree). In addition, the redemption must be possible at least every 15 days for UCITS funds and at least once every year for AIFs qualified as open-ended.
An Italian CIS must be closed-ended when it invests in real estate, or in unlisted financial instruments representing more than 20 per cent of the portfolio.
At the end of the first quarter of 2022, there were 28 groups and 209 managers of CISs offering their products in Italy, consisting of 5,525 open-ended funds distributed in Italy, of which 1,164 are domiciled in Italy and 4,361 abroad (including foreign-domiciled funds of Italian asset managers), as well as 111 closed-ended funds (61 Italian and 50 foreign).3
Main sources of investment
In 2022, after continuous growth, the AUM represented by investment products and services marketed in Italy experienced a decrease.
The total AUM (CIS plus segregated portfolios) at the end of the first quarter of 2022 were €2,485,759,000,000 – a figure lower than the €2,594,243,000,000 AUM at the end of 2021. The €2,485,759,000,000 AUM were almost equally split between collective investment schemes (UCITS, AIFs) and segregated portfolios (retail segregated portfolios, pension funds, insurance products), as the CIS accounted for €1,301,935,000,000 (or 52.4 per cent of the total AUM) and the segregated portfolios for €1,183,823,000 (or 47.6 per cent of the total AUM).
The total net inflow in the asset management industry in the first quarter of 2022 decreased to €10,927,000,000, materially lower than the €23,203,000,000 inflows in the last quarter of 2021. Among these inflows, €13,998,000,000 were into collective investment schemes, while the segregated portfolios experienced a negative result with –€3,071,000,000, confirming a strong preference of Italian investors for funds rather than for discretionary solutions.
In the same period, the portion of the €13,998,000,000 inflows into collective investment schemes attributable to open-ended funds – almost exclusively UCITS – was €12,774,000,000, with an undisputed prevalence of equity funds (€9,241,000,000), followed by asset allocation funds (€5,249,000,000) and flexible funds (€364,000,000). Flexible funds experienced decreases in their inflows (minus €5,412,000,000).4
With regard to inflows, the trend continues to be negative especially for bond funds: while there was in May 2022 a positive inflow for bond funds of €2,528,000,000 (and €608,000,000 for asset allocation funds), bond funds experienced a negative result of minus €3,2999,000,000.
Environmental, social and governance (ESG) funds continue their positive trends, not least because several funds originally not complying with Articles 8 or 9 of the Sustainable Finance Disclosure Regulation (SFDR)5 were eventually converted into Article 8 or Article 9 funds during 2021 and the first months of 2022. The majority of the new exchange traded funds listed on the Italian exchange also featured ESG characteristics.6
With regard to the actions taken by the government in response to the crisis that has impacted on asset management, see Section I, especially the discussion on PIRs.
The reference legal text on insurance matters is Legislative Decree No. 209 of 7 September 2005, called the Private Insurance Code, as amended and supplemented. The Private Insurance Code consolidated in a single text the pre-existing insurance regulations, except those contained in the Civil Code, the law establishing the Insurance Supervision Authority (IVASS) (Law No. 135/2012, converting, with amendments, Law Decree 95/2012) and some accounting regulations.
The Private Insurance Code establishes the fundamental rules for the insurance industry and defines the competences of IVASS. In particular, it grants IVASS the power to issue second-level rules such as regulations and measures, and to adopt prudential measures. Furthermore, IVASS pursues the sound and prudent management of supervised entities, their transparency and fairness towards customers and the stability of the system and the financial markets. IVASS performs supervisory functions by exercising powers of an authoritative, prescriptive, ascertaining, precautionary and enforcement nature. Insurance and reinsurance undertakings, insurance groups, financial conglomerates in which undertakings are included, persons performing functions partly included in the operational cycle of undertakings and insurance and reinsurance intermediaries are subject to its supervision.
In May 2021, IVASS updated the contents of its website with the main Italian rules applicable to foreign insurance companies operating in Italy.7
The Italian regulatory framework applicable to pension funds consists of statutory provisions, some of them implementing European directives, issued by the government by delegation of the Parliament; the main legislation consists of Legislative Decree No. 252 of 2005, as amended (LD 252), ministerial decrees and rules issued by COVIP, the Italian pension funds regulator.
European Directive 2016/2341 of 14 December 2016 ( the institutions for occupational retirement provision II or IORP II Directive) was transposed in Italy through Legislative Decree No. 147 of 13 December 2018, which thoroughly amended the LD 252.
On 29 July 2020, COVIP issued a resolution containing a first set of second-level rules for the implementation of LD 252, as amended, to transpose the IORP II on 19 May 2021. On 19 May 2021, other second-level rules were issued by COVIP: these consist of the new template constitutional documents of the various types of Italian pension schemes to comply with the IORP II Directive.
As to the rules contained in ministerial decrees (of the MEF), it should be noted that Ministerial Decree No. 166/2014 replaced the old rules of 1996 on the eligible assets and investment criteria for Italian pension funds.
iii Real property
The regulatory updates introduced by AIFMD also involved real estate CISs, the relevant pieces of regulation are included both in the TUF and in Bank of Italy Regulation of 19 January 2015, as amended, on the collective portfolio management.
According to Italian regulation, real estate CISs are of a closed-ended type (see Section III). As the funds raised are intended to be invested in real estate assets, the possibility of redeeming the unit before maturity is generally not allowed, so the investor can only liquidate this type of instrument by selling it on the secondary market, either regulated (if the fund is ordinary) or over the counter. Real estate CISs are set up closed-ended, and the units of funds with a minimum subscription below €25,000 need no longer be listed.
Italian real estate CISs invest no less than 66 per cent of their assets (or 51 per cent, in certain circumstances) in real property, real estate rights, stakes in real estate companies and units of other real estate CISs. For the valuation of real estate assets and real estate rights in which the fund’s assets are invested, as well as shareholdings in unlisted real estate companies, the SGR,8 which has not delegated to third parties the task of valuing the fund’s assets and calculating the value of the share in it, makes use of independent experts who meet the requirements established by the MEF Decree; however, such valuation will not be binding, and if the SGR intends to deviate from the valuation made by the experts, it shall inform them of its reasons.
In addition to real estate CISs, it should be noted that Law No. 130 of 1999 introduced real estate special purpose vehicles (SPVs), as well as SPVs on credits, and, subsequently, the Italian tax administration confirmed that the fiscal benefits that were granted to the securitisation of credits are also applicable to the securitisation of real estate.
iv Hedge funds
While there is not an express definition of hedge funds in the Italian legislation, vehicles of this type are usually included in the category of reserved AIFs for which, as mentioned in Section II, the Italian rules do not provide requirements as to the eligible assets, and therefore their assets can be invested by way of derogation of the prudential rules of risk containment and fractioning established by the Bank of Italy.
The other characteristics of hedge funds are described in the description of Italian AIFs in Section II.
v Private equity
In the case of private equity funds, the AIFMD has substantially amended the relevant Italian regulations, in particular the TUF. It should be noted, however, that there is no definition of private equity in either the European or the Italian regulations.
CISs that, descriptively, fall within this category are generally, from a regulatory point of view, closed-end CISs, but with potentially very diverse characteristics.
The European regulations only consider sector-specific rules for some specific types of CIS in the broad sense of the term, such as the EuVeCa, EuSeF or ELTIF CIS that have appeared in the EU regulatory landscape following the AIFMD. In Italy, the Italian Association of Private Equity, Venture Capital and Private Debt (AIFI) has defined private equity as the ‘activity of investing in the risk capital of unlisted companies, with the aim of enhancing the value of the company being invested in with a view to its disposal within a medium to long term period’.
According to the AIFI, in 2021 private equity and venture capital funding was equal to €5,725 million, of which €5,359 million was raised on the market (with overall growth of 119 per cent over 2020).
The amount invested (private equity, infrastructure venture capital) was equal to €14,699 million, 123 per cent more when compared to 2020.9
The main piece of Italian tax legislation is the Consolidated Text on Income Tax (TUIR), issued by means of President of the Republic Decree (DPR) No. 917 of 1986, as amended. The TUIR is regularly amended through changes introduced by the Budget Laws, according to the financial needs of the state.
However, the main principles and types of taxable income remain the same. With regard to CISs, there is no taxation at the level of the vehicle (subject to exceptions), while at the level of the investors, the tax is levied when income or capital gain is actually received by the investor, except in cases of segregated accounts, where taxes are paid on the positive difference, if any, in the net asset value of the managed portfolios between the initial and the last day of the fiscal year. In the case of losses, they can be deducted for the next four years.
A specific aspect of the Italian system compared to other legislations is the distinction between capital income (Article 44 of the TUIR) and other income (Article 67 of the TUIR), whereas the investor is not allowed to offset gains and losses earned in the different types of income mentioned above.
Capital income includes, in general, foreseeable interest and income obtained from a stable use of capital, such as interest and coupon; other income consists of income of a financial nature that generates capital gains or losses in relation to uncertain events, such as capital gains. The other income category also includes, on a residual basis, all other income derived from other forms of capital employment, which is taxed net of capital losses, losses and costs.
These two income categories are autonomous and distinct and cannot be offset against each other: for example, capital income consisting of a dividend may not be offset against a capital loss consisting of a lower redemption value of a fund compared to the subscription price.
The situation of income deriving from participation in a CIS is quite peculiar: if positive, it is qualified as capital income and, if negative, it constitutes capital losses.
In particular, income deriving from the participation in CISs, either UCITS or some AIFs, the units or shares of which are placed in Italy in accordance with the TUF, are subject to a withholding tax of 26 per cent, with a reduced rate of 12.5 per cent for the part of the above income, if any, originated from the portion of the assets of the relevant CIS invested in governmental bonds of Italy and other foreign countries specified by the Italian Finance Administration – known as white list bonds. This withholding is levied upon redemption of the units or shares by the entities that are in charge of the payment of the above income, and is levied also in cases of conversion between sub-funds and transfer of the units or shares to another party. The withholding is levied by way of tax advance with respect to professional investors and by way of tax with respect to all the other cases (e.g., retail investors).
The Italian 2021 Budget Law (Law No. 178 of 30 December 2020) has exempted EU and EEA CISs from taxation on capital gains and dividends deriving from investments in Italian companies. It should be noted that Italian CISs already benefit from this exemption, and thus the 2021 Budget Law has eliminated a discrimination between Italian and foreign players that was also condemned by the European Court of Justice.
Italy will hold general elections in late 2022 or early 2023, and thus the decisions of the new government in terms of the allocation of the resources of NextGenerationEU10 and of the National Plan for Recovery and Resilience will affect the operations of the Italian companies and their appeal for foreign investments.
As to ESG provisions, the war in Ukraine, with the consequent dramatic lack of resources deriving therefrom, has raised some doubts on the timing for the transition to a carbon-neutral economy consisting of renewable sources (e.g., the government has decided to reopen some coal-powered electric generation plants, and the EU has inserted nuclear and gas among ESG-compatible sources of energy), and this situation could affect the attractiveness of ESG products, or at least their characteristics.