Italian Transfer pricing guidance for implementing the investment management exemption

Ministerial Decree of 22 February 2024 (Ministerial Decree) and the Italian Tax Authority (ITA) Regulation No. 68665/2024 (Regulation) implement the investment management exemption rules in Italy.

 

REGULATORY FRAMEWORK

The Law no. 197/2022 (Budget Law 2023) modified Article 162 of the Income Tax Code (TUIR), concerning permanent establishment, by adding paragraphs 7-ter, 7-quarter, 7-quinquies and 9-bis.

The legislator has introduced the investment management exemption (IME) provision to encourage foreign investment in Italy.

According to Article 162 (7-ter) and subject to certain conditions, a resident or non-resident entity (even if it acts through its own permanent establishment – PE) operating in Italy in the name and on behalf of a foreign investment vehicle or its controlled entities does not qualify as a PE of the foreign investment vehicle, even if it exercises discretionary powers. This also applies if the entity regularly concludes, or contributes to concluding purchases, sales and/or trading of financial instruments (including derivatives, equity interests and receivables).

The IME presumption applies if the following requirements, as provided by Article 162 (7-quarter), are met:

• the non-resident investment vehicle and its subsidiaries are resident or established in a white-listed State or territory, pursuant to Article 11(4)(c) of Legislative Decree No. 239/1996;
• the investment vehicle fulfils the conditions of independence required by the Ministerial Decree (see Section 2 for details);
• the resident or non-resident investment management entity is not involved in management or supervisory bodies of the foreign investment vehicle (and of its controlled subsidiaries) and does not hold a participation to the economic results of the foreign investment vehicle for more than 25% (as determined on a cumulative basis with other companies of the same group);
• the investment management entity (or its branch) operating in Italy must draft the transfer pricing documentation supporting the arm’s length nature of the remuneration received for the provision of intercompany services for the benefit of related parties. In this respect, ITA’s Regulation, published on 29 February 2024, sets out the transfer pricing guidance for the remuneration of the investment management entity (see below for details).

 

THE MINISTERIAL DECREE

The Ministerial Decree, published on 4 March 2024, implements the IME regime through three provisions.

Article 1 clarifies the definition of non-resident investment vehicles and lists those that can be considered independent, such as:

• undertaking for collective investments (UCI) established in the EU territory or SEE, enabling an adequate exchange of information (as provided by Directive 2009/65/EC and EU Council Directive IV) or have a manager under supervision in the State where it is established pursuant to Directive 2011/61/EU;
• UCI meeting certain requirements (eg the undertaking or the manager is subject to prudential supervision);
• entities under prudential supervision whose sole or principal business purpose is to invest the capital raised from third parties and meet certain criteria (eg maximum thresholds of participation and the capital raised should be managed autonomously for investors' interest only).

According to the explanatory report, collective investment in transferable securities (UCITS) and alternative investment funds (AIFs) can be considered independent investment vehicles for the purpose of the Ministerial Decree. Conversely, entities like family offices and club deals don’t fall within the scope of the Ministerial Decree since the investment manager is not independent from the vehicle itself.

Article 2 implements Article 162 (7-quater)(c) TUIR, by listing the agent’s independence requirements (applicable also to the investment management entity’s employees and directors). In this regard, they don’t have to hold:

• roles in the management and/or control bodies of the foreign investment vehicle (or of its subsidiaries);
• participations in the economic results of the foreign investment vehicle (or of its subsidiaries) of more than 25%.

According to Article 3, the definition of company’s control relevant in the IME context should follow Article 2359 (1) of the Civil Code. In addition, the resident or non-resident investment management entity (or its PE), dealing with intercompany transactions, should prepare the transfer pricing documentation supporting the arm’s length nature of its intercompany remuneration.

 

THE ITA’S REGULATION

On 29 February 2024, ITA published the transfer pricing guidance (TP Guidance). Investment management entities based in Italy of a foreign investment vehicle should follow the TP Guidance to assess the arm’s length remuneration for providing intercompany services.

More specifically, the TP Guidance provides for criteria to select the most appropriate transfer pricing method to be applied for IME purposes. The relevant services encompass the two following categories:

• Investment management services, provided in the name or on behalf of the investment vehicle or its subsidiaries, such as:
• managing investments, such as the purchase, sale, or trading of financial assets (including derivatives, equity instruments and debt instruments) based on a pre-determined investment policy;
• funds administration, such as legal and accounting services related to the capital raised, investors relations (eg clients’ reporting, valuation, and pricing of the assets under management, including tax ones), keeping investors’ registries, verifying the compliance with applicable legislation, distribution of proceeds, shares issuance/redemption and settlements of contracts;
• marketing and distributing products, including any offering, solicitation or promotion of the subscription or distribution of quotas/shares to investors (in any manner and whether direct or indirect).

• Services related and instrumental to investment management, provided in the name or on behalf of the investment vehicle or its subsidiaries, such as:
• promotion and development of the investment management, like investment advisory and consulting services;
• ancillary activities, eg economic, and financial research and analysis, financial and economic data/information processing, transmission and disclosure, setup and management of IT and data processing services, management of real estate properties, administrative and accounting services.

Regarding investment management services, which includes the activities that are, typically, the most value-adding in the investment management industry, the TP Guidance defines a hierarchy of transfer pricing methods (TP method), where the Comparable Uncontrolled Price (CUP) method is the most preferable. However, if the accurate delineation of the transaction, facts and circumstances and the comparability analysis prove that the entities involved in the intra-group transaction:

• share the assumption of the same economically significant risks;
• assume separately economically significant risks, which are strictly interconnected; and
• the CUP method cannot be reliably applied;

the Transactional Profit Split Method (PSM) should be considered as the most appropriate methodology based on the contributions rendered by each of the parties involved.

Where neither the CUP nor the PSM can be applied in a reliable way, one of the other TP methods provided by the Transfer pricing guidelines issued in 2022 by the OECD (the OECD TP Guidelines) and by the Italian TP regulations contained in the ministerial decree issued in 2018 (TP Decree) should be used with the express exclusion of those methods featuring a profit level indicator based on costs.

However, if the accurate delineation of the transaction documents that the activities performed don’t involve the assumption of economically significant risks, any of the TP methods, as enumerated by and following the criteria set by the OECD TP Guidelines and the TP Decree, can be evaluated.

Regarding the services related and instrumental to investment management, all the TP methods are acceptable, unless the transaction involves the assumption of economically significant risks. In this case, the same logic and hierarchy of the TP methods, as identified for the investment management services, must be considered.

The TP Guidance clarifies that investment management services and services related and instrumental to investment management must be assessed together to the extent they are strictly interconnected and cannot be reliably separated. In this case, the same hierarchical preference of the TP methods, as per the services applies.

Finally, the TP Guidance further clarifies that to comply with the IME conditions set forth in Article 162 (7-quarter)(d) TUIR, the transfer pricing documentation to be drafted by the investment management entity (or its PE) operating in Italy must analyse the intercompany transactions (dealings) related to the above described services. It also has to comply with the ITA’s regulation no. 360494/2020 to benefit from the penalty protection regime in case of TP adjustments on those transactions.

 

PRELIMINARY COMMENTS

In light of the introduction of the TP Guidance for IME purposes, investment management companies, advisory companies and other entities operating in the investment management sector should consider assessing the implications of the new regulation on their current or future operations in Italy and, potentially, review their relevant transfer pricing policies.

Taxpayers also have to pay attention to the possibility that ITA might rely on the TP Guidance to assess intercompany transactions and dealings in the investment management industry in a context other than the IME.