The 2015 economic outlook for Italy is grim, with little or no projected economic growth.
Unemployment remains high, which reduces consumer confidence and spending, and little is being done to ease labour costs. Italian banks are holding an estimated €333bn (£239.3bn) in non-performing loans, preventing new investment in businesses.
Lending regulations that have historically made it difficult for Italian businesses to access credit from foreign investors exacerbates this problem.
Italy has, however, identified this problem and is in the process of removing some of the regulatory and tax hurdles that have made the country less accessible to the investment fund community. These reforms are a good foundation for the economic and financial reform needed to ensure sustainable growth.
Last year, the Italian government adopted Law Decree No 91, converted into Law August 11 2014, aimed at facilitating investment by non-Italian companies into Italian-based enterprises. Previously, non-Italian banks and hedge funds were restricted from lending directly to Italian companies.
Excluding natural persons and micro-enterprises (enterprises that employ fewer than 10 people and whose annual balance sheet does not exceed €2m), Italian securitisation vehicles (ISVs), Ucits and insurance companies are permitted to lend directly to Italian borrowers, provided:
• During the origination process, banks or financial intermediaries are used to select potential borrowers;
• Such banks or financial intermediaries retain a ‘significant interest’ in the financing transaction (for example, not less than 5 per cent of the loan if granted by an insurance company, although the limit has not yet been set for ISVs);
• Notes issued by an ISV to fund the financing are available only to ‘qualified investors’.
The decree also introduced certain tax benefits for non-Italian investors, applicability of the substitute tax regime for medium-long term loans (loans with a term of at least 18 months plus a day) and an exemption from withholding tax. The substitute tax regime allows a borrower to elect to pay a 0.25 per cent tax on the principal amount of the financing, which in some cases can be less than ordinary documentary taxes applicable to such transactions.
Additionally, it introduced an exemption from withholding tax for profits and interests on medium-long term loans, granted by:
• Financial institutions established in an EU member state;
• Insurance companies established and authorised under the law of an EU member state;
• Collective investment undertakings that do not make use of financial leverage (including tax-transparent entities set up in EEA countries included in a list of territories permitting adequate exchange of information with Italian tax authorities).
These regulatory changes will facilitate the sale of non-performing loan portfolios through an ISV, which would improve investment spending by permitting Italian banks to divest their non-performing assets in an efficient manner.
The government has indicated that it will enact additional regulations in the first half of 2015. By expanding the scope of the ‘qualified investor’, it will also increase the foreign source of income for businesses.