Tax exemption is not applicable to proceeds paid to foreign investment funds not equated to Italian UCITS

In the Tax Ruling n. 162 dated 30th March 2022, the Italian Revenue Agency analyzes the tax regime applicable to proceeds distributed to foreign funds. The Agency clarifies that foreign investment funds, if not equated with an Italian UCITS, are not entitled to any tax benefit and, therefore, no exemption regime applies to proceeds paid by an Italian real estate fund to these foreign funds.

In the case under analysis, a foreign asset management company manages an investment fund, which holds 10% of the shares of an Italian closed-end real estate fund. The fund is established in the form of a “fond de placement contractuel”. From a regulatory point of view, it is an investment fund under foreign law, without legal personality and intended for qualified investors; with regard to the tax profile, the fund is tax transparent. The fund is directly and wholly owned by a foreign pension fund.

Under the Italian tax law (art. 1, paragraph 1, letter j), Legislative Decree no. 58/1998 (TUF), a mutual investment fund is defined as a “…UCITS with independent assets, divided into units, set up and managed by a manager…”. Furthermore, a collective investment scheme is defined as “…the body set up for the provision of the collective asset management service, the assets of which are raised among a plurality of investors through the issue and offer of units or shares, managed in the interest of the investors and independently from them as well as invested in financial instruments, loans – including those disbursed, in favor of subjects other than consumers, out of the UCITS assets – shareholdings or other movable or immovable property, based on a predetermined investment policy…”.

The exemption from Italian WHT is applicable to those investment funds governed by foreign law which, regardless of their legal form, have the same investment purposes as Italian pension funds and UCITs.

In order to assess the equivalence of the foreign fund to an Italian UCITS for tax purposes, it is necessary to verify the existence of the above-mentioned requirements, characterizing a collective investment fund governed by Italian law, that is to say, the collective management of the savings collected from a plurality of investors and the autonomy of the management company’s decisions with respect to the influence of the participants.

In the Circular Letter no. 2/2012, the Italian Revenue Agency clarifies that the definition of UCITS – contained in the TUF and consistent with the European regulatory framework – highlights, as essential characteristics, the economic function of the fund, i.e. the collective management of the savings collected from a plurality of investors, and the autonomy of the decisions of the asset management company with respect to the influence of the participants.

As stated in the Bank of Italy regulation on collective asset management, the requirement of “plurality of investors” can be considered satisfied even in the presence of a single investor, if the investment is made in the interest of a plurality of investors (eg. funds of funds).

In addition, the Resolution no. 137 / E clarifies that a fund needs a plurality of subscribers, unless the sole holder represents a plurality of interests so as to represent a collective management.

As far as the “autonomy” of the asset manager is concerned, this prerequisite constitutes the principle on the basis of which the fund participants cannot have direct competence connected to the management of the fund and to the assets in its portfolio. As for the investment policy, it is an essential part of the fund regulations and is therefore necessarily predetermined for the execution of the investments themselves.

In the tax ruling under analysis, the question concerns the possibility that the fund, despite being managed by an asset management entity subject to supervision, does not act in total autonomy with respect to the fund participant, i.e. the foreign pension fund, as the latter is also the delegated investment advisor with respect to three portfolios within a sub-fund of the fund. This circumstance, according to the Revenue Agency, does not ensure the condition of the total autonomy of management decisions by the asset management company with respect to the influence of the participating pension fund.

This circumstance does not ensure the condition of the total autonomy of management decisions by the management company with respect to the influence of the participating Pension Fund. Therefore, since the fund at hand cannot be equated with an Italian UCITS, it is not included in the aforementioned article 7, paragraph 3 of Legislative Decree 351/2001. Consequently, the exemption regime does not apply to the proceeds paid by the Italian real estate fund to the foreign fund at issue.

If you wish to discuss these topics, please contact: WTS R&A Studio Tributario, Milano

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