Special Italian tax regime applicable to medium-long term loans: abuse of law?

The Italian tax authorities have recently issued a ruling(1) (Ruling) concerning the applicability of the special Italian tax regime provided for medium-long term loans.

Background

Pursuant to Article 15 et seq. of the Presidential Decree of 29 September 1973, No. 601, as further amended and supplemented, lending transactions which:

• are made available by a bank;
• qualify as "medium-long term loans" due to a maturity longer than 18 months; and
• are executed in Italy

are exempt from registration tax, stamp duty tax, mortgage tax, cadastral tax and any other government concession tax. This exemption also applies to the relevant security package. The taxes indicated above are replaced by a special tax (the so-called "imposta sostitutiva"), which is generally levied at the rate of 0.25 per cent. However, where conditions 1 and 2 but not 3 are satisfied, lenders have sometimes sought to argue that none of the above taxes (Transaction Taxes) are payable.

Lending transactions executed outside of Italy, identification of the place of execution and the position of the Ruling

In the past, the Italian tax authorities have sometimes challenged as abusive scenarios where the parties to a financing transaction (all Italian resident) signed and executed the facility agreement outside of Italy so as to avoid Transaction Taxes.

According to the position taken by the Italian tax authorities in the Ruling, the mere signature and execution of a facility agreement outside of Italy is not, without more, sufficient to make a transaction abusive. The Italian tax authorities, however, focus on the criteria to be used for identifying the place in which a lending transaction is deemed to have been executed, in order to evaluate whether a facility agreement signed outside of Italy is always excluded from the imposta sostitutiva regime. In particular, the Italian tax authorities focus their attention on the fact that the various steps of the arrangement and negotiation of a financing are made by internal departments of the lending entity, particularly credit committee approval. Therefore, in many scenarios where the financing agreements are signed outside of Italy, the documentation and the relevant lending decisions have effectively originated in Italy.

Given the above, the place in which the financing transaction is deemed to have been executed is the place in which the basic and essential elements of the transaction have been agreed among the parties (e.g. the place in which a term sheet or similar documentation has been signed) and not where the facility agreement has actually been signed (particularly where Italian law does not require specific signing formalities) as this agreement has to be characterised as a mere "repetition and supplement" of the term sheet.

The position of the Italian tax authorities may be challengeable for a number of reasons (among others, the fact that certain financial transactions require specific signing formalities or are deemed to have been executed when the funds are actually made available to the borrower). Nor does their position accord with the fact that the commitment of the banks expressed in the term sheet will be subject to the finance documents being drafted in a way satisfactory to the lenders.

Please click on the links below for the other articles in the June 2013 tax newsletter.

• Partnership taxation - HMRC consultation on avoidance involving partnerships
• Bristol & West plc
• Fidex Ltd -v- HMRC
• STICS - discounts go to Hades
• General anti-abuse rule (GAAR)
• WHA Limited -v- HMRC
• Colaingrove: composite supplies for VAT purposes
• Middle Temple -v- HMRC
• The Royal College of Paediatricians -v- HMRC
• PPG Holdings BV - AG's opinion on VAT on management advice to pension fund
• HMRC brief on SDLT overpayment relief for TOGCs following Robinson case

_Note:

_{(1) Ruling 28 March 2013, no. 20/E}