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Changes in Regulatory and Tax Law for Italian REITs

Italy
26 Jul 2010

On 31 May 2010 a new Decree provided - among other measures - a number of amendments to the regulatory and tax regime for Italian real estate investment funds (REITs). The Decree is aimed at counteracting the abuse of REITs that: (i) have a restricted number of investors, and (ii) are set up mainly to benefit from the favourable tax regime. Taxand Italy examines the impact of the amendments to the regime.

1. New definition of "investment fund"
The Decree modifies the definition of "investment fund" (not only for real estate funds), provided by Decree and defines the main features of an investment fund as follows:

a. funds must be collected among a plurality of investors

b. funds must be invested according to a pre-determined investment policy

c. assets of a fund are under the exclusive responsibility of the asset management company (here after "SGR"), which shall operate without any influence by the investors

The "Report" to the Decree clarifies that the favourable tax regime is therefore restricted only to funds which raised among a plurality of investors and that are aimed at carrying out activities of public interest. As a consequence, REITs not fulfilling these requirements (plurality of investors, predetermined investment policy, no influence from the investors), are excluded from the current special tax regime of REITs.

It has to be noted that the new provisions do not provide an alternative tax regime applicable to the funds which do not meet the above requirements: for those funds, only two routes are available: (i) to modify structure and governance to accomplish to the new rules or (ii) to go liquidate.

2. Substitute tax
The existing REITs that do not meet the above requirement are obliged to resolve upon adjustment of their structure and/or governance and then pay an extraordinary substitutive tax at the flat rate of 5% to be applied on the average net asset value of the fund for the years 2007, 2008 and 2009.

The substitutive tax will be paid by the SGR on behalf of the REIT as follows: 40% up to 31 March 2011; 30% up to 31 March 2012 and 30% up to 31 March 2013.

3. Liquidation of existing funds
In case no action is taken the existing funds which are not in line with the new definition of "investment fund" are to be liquidated. In such case, however, the extraordinary substitutive tax will be due at the rate of 7%. This substitutive tax is due in substitution of corporate income tax only, not in substitution of VAT and other taxes due as a consequence of the liquidation.

4. Withholding tax on profits distributed by Italian REITs to non-resident investors
The Decree also abolishes the favourable tax regime for non-resident investors in Italian REITs. In fact providing a tax exemption from the domestic withholding tax on profit distributed by Italian REITs to the following investors:

i. investors resident in white-listed countries

ii. entities and international bodies established according to international treaties implemented in Italy

iii. institutional investors, although not subject to tax, established in white-listed countries

iv. central banks and bodies which manage the official reserves of a country

Now that this tax exemption has been abolished, the domestic 20% withholding tax becomes applicable.

5. Entry into force of the Decree and other issues
The Decree entered into force on 31 May 2010. However it will not become law until the end of July, so that some changes could be expected.

Moreover, the Decree provides that the Ministry of Finance has to issue a number of further regulations after the Decree is made Law.


Taxand's Take


For the time being, non-resident investors should carefully monitor investment in Italian REITs seeking to be prepared to reduce the impact of the new changes in regulatory and tax law on investments.

Your Taxand contacts for further queries are:
Guido Arie Petraroli
T. +39 02 7260 591
E. gpetraroli@fantozzieassociati.it

Maurizio Busecchian
T. +39 02 7260 591
E. mbusecchian@fantozzieassociati.it

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