November 19 2010
Law-Decree 78/2010, which was converted (with amendments) into Law 122/2010, was published in the Official Gazette on July 30 2010. Among other things, it introduces changes to the tax system in respect of real estate investment trusts (REITs).
The new law-decree amends Law Decree 58/1998 to introduce a new definition of the term 'investment fund' that better reflects the economic function of such funds. Among other things, an investment fund must have input from more than one investor. The new provisions are intended to prevent the real estate fund structure from being abused as a vehicle for private investment by a single entrepreneur. Real estate funds enjoy a favourable tax regime characterised by:
A report on the new law-decree emphasises that the special tax regime must be restricted to funds whose purpose is to encourage the investment in real estate of savings held by the general public and to allow for the collective management of such investments.
The new law-decree leaves the specification of the requirements for REITs to a ministerial decree, which is still being drafted, but is likely to be issued before the end of 2010.
REITs which do not meet the new requirements can either make the required adjustments or proceed to liquidation. If an existing REIT elects to adopt the necessary compliance measures, the management company must retain a substitute tax equal to 5% of the fund's net asset value on December 31 2009. The tax charge is payable in three instalments by the management: 40% must be paid by March 31 2011, with a further 30% falling due on the same date in 2012 and 2013.
If an existing REIT does not adopt the necessary compliance measures, the management company must take steps to liquidate the REIT. In this case the tax charge is equal to 7% of the fund's net asset value on December 31 2009 and falls due on the same dates and in the same instalments as the tax for the adjustment of a REIT.
The law-decree also states that in addition to the tax on the fund's net asset value, the management company must pay substitute income tax and regional tax equal to 7% of the fund's annual income between January 1 2010 and the conclusion of the liquidation procedure (which must be completed within five years).
The 1% wealth tax which was introduced by Law Decree 112/2008 and which applied to certain funds (ie, family funds or so-called 'thin participation' funds) has been repealed.
The law-decree also modifies the favourable tax regime for non-resident investors in Italian REITs. Under the previous system, the 20% withholding tax on distribution - that is, dividends paid to investors or, in the event of reimbursement of the units, amounts paid to investors in excess of the subscription or purchase price that such investors had originally paid - did not apply to non-resident recipients in a state with which Italy had an exchange of information agreement.
The new provisions state that an exemption from domestic withholding tax does not apply to REIT distributions to:
Other foreign investors can benefit from the reduced treaty rate (which is normally lower than the 20% rate set by Italian law) if a double tax treaty with Italy applies. However, a mismatch may arise if the qualification of REIT distributions by Italy and the investor's country of residence is inconsistent. In some countries proceeds from REITs are deemed to be dividend income, whereas other countries regard such proceeds as income from real properties.
Generally speaking, Italian law classifies distributions by REITs as interest income; thus, the previous exemption was granted by recalling the withholding exemption provided for interest on bonds issued by listed companies and banks. The new provisions are unclear on this point. Thus, the terms of each double tax treaty will regulate the matter.
On the basis of Article 10(3) of the Organisation for Economic Cooperation and Development Model Convention, a definition of 'dividends' may include or exclude income from REIT units, depending on several factors. In any event, the legislation of "the state where the company making the distribution is resident" (in this case Italy) should determine the guiding principle.
The classification of income by the investor's jurisdiction of residence may also limit the foreign tax credit in respect of the Italian withholding tax borne by the non-resident investor if such classification differs from that applied in the source country.
In order to ensure the application of the withholding tax treatment for which the relevant double tax treaty provides, a foreign investor must provide the Italian withholding agent (ie, the management company) with:
These rules apply to proceeds distributed from the date on which the law-decree came into force, in respect of the REIT's activity after December 31 2009.
For further information on this topic please contact Marco Abramo Lanza or Simona Zangrandi at Studio Legale Tributario Biscozzi Nobili by telephone (+39 02 763 6931), fax (+39 02 780 146) or email (firstname.lastname@example.org or email@example.com ).
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