Further clarifications on the investment management exemption regime

The Italian Tax Authority (ITA) has issued a new Circular No. 23/E dated 19 November 2024 (IME Circular) to clarify the Investment Management Exemption (IME) rules.

 

REGULATORY FRAMEWORK

Law No. 197/2022 (Budget Law 2023) modified Article 162 of the Income Tax Code (ITC), concerning permanent establishment. It introduces the IME provision applicable from 2024 to encourage foreign investments 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 doesn't 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).

Ministerial Decree of 22 February 2024 (IME Decree) and the ITA's Regulation No. 68665/2024 (IME Regulation) provide the rules on implementing the IME regime in Italy.

 

THE IME CIRCULAR

The IME Circular, published on 19 November 2024, clarifies certain requirements underlying the IME regime, such as independence requirements for foreign investment vehicles and for asset manager / advisory companies. It also confirms that the IME regime won't apply to non-resident foreign asset/advisory companies, but only to foreign investment vehicles and/or their subsidiaries. A case-by-case assessment must be performed to determine whether or not the asset management activities carried out in Italy trigger an Italian PE.

The IME Circular focuses on the TP analysis to be made in relation to asset management business and on the documentation requirements that have to be met to qualify for the IME regime.

Independence requirements

The safe harbour stated by the IME regulation is provided when there's a clear separation – or rather, independence – between the investment structures and the asset manager. This independence is ensured when dealing with:

• OICVM and FIA of the EU;
• non-EU OICR subject to information exchange and supervision;
• non-resident entities, assimilated to the above, if supervised and located in states that ensure adequate exchange of information with Italy – "White-list Countries."¹

The same principle applies to non-resident companies that are directly or indirectly controlled by the investment vehicles.

For EU OICVM and FIA, and the non-EU OICR mentioned above, the independence of the asset manager is automatically presumed. For other non-resident entities, the IME Circular specifies that independence exists if the asset manager or its employees and directors:

• don't have operational mandates within the decision-making chain of the non-resident investment structure (specific mandates for individual acts are allowed);
• don't hold a participation in the economic results of the non-resident investment vehicle exceeding 25%, including the share received as carried interest.

These principles also apply when management activities are delegated or sub-delegated.

Remuneration of intercompany services

One of the conditions for claiming IME safe harbour is that the remuneration received by the asset manager or advisor company for any activity rendered within an intercompany transaction is supposed to be at arm's length. And it has to be supported by TP documentation meeting local requirements under Article 1(6) of Legislative Decree No. 471 of 18 December 1997 (ie the penalty protection regime in case of a transfer pricing challenge) and consistent with the applicable IME Decree/IME Regulation.

The IME Circular clarifies that this condition applies when the relevant intercompany services are rendered by a resident entity, or by the Italian PE of a non-resident entity. If, instead, the operations of an asset manager don't involve any intercompany cross-border transaction, the IME safe harbour might still apply if the other conditions under Article 162, paragraph 7-quater of the ITC are met.

The IME Circular comments on the key topics addressed in the IME Regulation, which include:

• For asset management related services, the methodology deemed as the most appropriate is the Comparable Uncontrolled Price (CUP) method. However, where it's found that counterparties involved in the transaction share the assumption of the same economically significant risks or separately assume economically significant but closely related risks, the CUP method may not be reliable, and the Profit Split Method, based on a contribution analysis, is considered more appropriate.
• The IME Circular provides further guidance concerning the factors that may be used to carry out the comparability analysis.
• To apply the Profit Split Method, the ITA emphasizes the importance of identifying the relative contributions generated by the intercompany transaction involving asset management activities, based on functions performed, risks assumed, and assets used. For umbrella funds, it's deemed appropriate to determine the total contribution of each party involved at the level of each compartment, in the event that the asset management services rendered in Italy should refer to more than one specific compartment among those attributable to the vehicle. The multi-factor approach, if feasible, is the preferred method for determining each function's contribution to the earning of the combined profit from the asset management activity.

Suitability of the TP / IME documentation

The IME Circular highlights the relationship between the documentation requirements under the IME rules and those under the TP framework (ie according to the TP Ministerial Decree issued on 14 May 2018 and the TP Provision No. 2020/360494 published on 23 November 2020).

Pursuant to Article 162, paragraph 7-quater (d) of the ITC, under the IME regime, the presumption of non-existence of a PE operates if the resident entity, or the domestic PE of a non-resident entity, receives remuneration supported by documentation that complies with the TP framework. To meet the specific requirements of the IME regime, the documentation has to include all the additional factual and economic information aimed at verifying the correct application of the IME Regulation's requirements.

During a tax audit, it's important to first assess – based on the indications included in the ITA's Circular No. 15/E of 26 November 2021 – that the Italian TP documentation has been prepared in accordance with the requirements laid out in the TP framework. If the suitability assessment is positive for TP purposes, it will be necessary to verify that the TP documentation also complies with the indications included in the IME Regulation.

So, if the ITA positively assesses the TP documentation, submitted by the taxpayer, regarding its suitability for applying the IME regime, any transfer pricing adjustments to the asset manager's income will not compromise the IME safe harbour and the penalty protection for TP purposes.

Conversely, if the Italian-compliant set of TP documentation is missing or is deemed unsuitable for the purposes of applying the IME regime, the taxpayer won't be protected by the IME safe harbour / TP penalty protection. In this case, if the conditions under Article 162 of ITC and, if applicable, Article 5 of the relevant Double Tax Treaty are met, the ITA could challenge the presence in Italy of a PE of the foreign investment structure.

---

¹ Jurisdictions listed in Article 11, paragraph 4, letter (c) of Legislative Decree No. 239 of 1 April 1996.