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Authorities target captive real estate funds

Authorities target captive real estate funds

Paolo Giacometti and Massimo Antonini, of Chiomenti Studio Legale explain the tax implications of new residency rules for real estate investors


Residency rules change for real estate investors

Over the last few years Italian real estate investment funds (REIFs) have become increasingly popularity, mostly due to their favourable tax regime. In particular, investors have frequently used REIFs as captive vehicles, through which the ownership of real estate assets was transformed into ownership of fund units, which were almost wholly owned by the same sponsors of the fund. Under such schemes, the tax advantages reserved to REIFs because they are public investment vehicles were available also to private investors. Moreover, Italian resident investors frequently owned the REIF's units through foreign vehicles to benefit from certain tax exemptions. The Italian tax authorities have recently enacted new provisions aimed at introducing a more burdensome tax regime for these captive REIFs and a tax residence presumption meant to discourage the use of foreign entities to own units in Italian REIFs.

The new provisions on REIFs

Law Decree No. 112 dated June 25 2008 (the decree, as converted into Law No. 133 of August 6 2008) introduced substantial amendments to the tax regime applicable to REIFs, including a new presumption of tax residence applicable to foreign companies or entities investing in REIFs.

Firstly, the withholding tax levied on proceeds distributed by REIFs has been increased from 12.5% to 20%. The withholding tax is not applicable, among other things, when the beneficial owner of the proceeds is a foreign company resident in a "white list" country.

Moreover, for those REIFs whose units are not listed in regulated markets, and having an equity value lower than €400 million ($539 million), a new yearly substitute tax at the rate of 1% of the REIT's net asset value is applicable, provided that:

  • the REIF has fewer than 10 unitholders (except where more than 50% of the units are held by certain qualifying investor, such as undertakings for collective investments in transferable securities (UCITs), pension funds and public entities); or

  • the REIF is incorporated under articles 15 and 16 of Regulation No 28 of May 24 1999 and it is deemed to be a "family fund", that is, a fund whose units are held for more than two-thirds by individuals considered as family members (husband, wife, relatives within the third degree and relatives-in-law within the second degree), even if the units are held through certain companies controlled by these relatives, or through a trust where the relatives are either settlors or beneficiaries.

The tax base of the 1% substitute tax is the net asset value of the fund, determined as the annual average of the values recorded in the periodical statements.

The new presumption of tax residence

In addition to these provisions directly affecting the REIFs tax regime, the decree also set forth a new presumption of tax residence in Italy for foreign companies and other entities whose equity is mainly invested in REIFs; the new provision is drafted along the same lines of certain other tax residence presumptions recently introduced by the Income Tax Code (Presidential Decree December 26 1986, No. 917 – ITC), thus evidencing the growing attention to the abuse of foreign vehicles.

The previous residence presumptions

As a general rule, according to ITC and to income tax treaties, companies and entities having their place of effective management in Italy for the greater part of the tax year are considered to be resident in Italy for income tax purposes.

Furthermore, paragraph 5-bis of art. 73 ITC says that the place of effective management of a foreign company or entity which directly controls an Italian resident company is always presumed to be located in Italy if:

  • the foreign company (or entity) is controlled, both directly or indirectly, by Italian residents persons; or

  • the board of directors (or other equivalent governing body) of the foreign company is composed, for the majority, by Italian residents.

The notion of control is provided by article 2359, par. 1, of the Italian Civil Code, which says that a company is supposed to control another company if it owns (i) the majority of the voting rights at the ordinary shareholders' meeting, or (ii) voting rights sufficient to exercise a dominant influence at the ordinary shareholders' meeting, or (iii) a dominant influence based on particular agreements.

Another presumption recently introduced in ITC concerns the tax residence of trusts. In particular, a trust is deemed to be resident in Italy for tax purposes when one of the following requirements is met:

  • the trust is set up in a blacklist country, and at least one of the beneficiaries and one of the settlors are resident in Italy for tax purposes; or

  • the trust is set up in a blacklist country and, following its incorporation, an Italian resident person transfers real estate properties to it, or grants or transfers rights in real properties to it.

The new residence presumption

According to the tax presumption introduced by the decree, a foreign company (or entity) is deemed to be resident in Italy for tax purposes when the following requirements are met:

  • the company's equity is mainly invested in REIFs; and

  • the company is controlled, both directly or indirectly, even through a fiduciary company or a interposed party, by an Italian resident person (both individual or entity).

However, the new provision does not specify the moment at which the existence of the two requirements must be verified. In particular, it is not clarified whether the two requirements must be met simultaneously, or if it is sufficient that during a given tax year they are both met, even in different moments.

The new provision differs from the presumption applicable to foreign holding companies, since it does not only refer to the place of management, but also to other criteria to verify the existence of the Italian tax residence.

Indeed, the new provision refers to the circumstance that the company's equity shall be mainly invested in Italian REIFs. In this respect, it is unclear how the wording "mainly invested" should be interpreted. Based on an interpretation released by the Italian tax authorities with reference to a similar case, it could be argued that reference must be made to the fair market value (and not the accounting value) of the REIFs' units owned by the foreign company, compared to the fair market value of all assets owned by the same.

Under this perspective, the new presumption differs from the presumption laid down by paragraph 5-bis of article 73 ITC, since the latter only requires the control by the foreign company over an Italian resident company, regardless of the value of the other investments made by the same company.

Diagram 1 clarifies the different application of the two presumptions.

Diagram 1: Presumptions of residence explained


Assuming that ForeignCo1 controls both an Italian resident company (ItalCo 2) and two non-resident companies, the presumption provided by par 5 bis would apply, even if the value of the investment in Italco2 is negligible compared to the value of investments in ForeignCo 2 and ForeignCo 3.

Under the same situation, but with ForeignCo 1 investing into an Italian REIF, ForeignCo 1 would not be considered as resident in Italy for income tax purposes.

It is worth pointing out that these presumptions of residence are alternatives. As a consequence, a foreign company that has both an investment in a REIF and a shareholding in an Italian resident company, could be deemed as tax resident in Italy even if it only meets the conditions required by one of the presumptions.

To rebut the presumption of residence, the foreign company has to give evidence that, in accordance with the general provision of paragraph 3 of article 73, it has not had for the greater part of the fiscal year either its legal seat, or its place of effective management or its main business purpose in Italy; in practice, this implies that the burden of proof is shifted on to the taxpayer.

However, when an income tax treaty is applicable, the taxpayer should only demonstrate that its place of effective management was not located in Italy.

Proof of place of management

In this respect, as clarified by the Italian tax authorities in a ruling dated November 5 2007, No. 312/E, certain aspects must be taken into account to establish the location of the place of management of a company or entity.

Firstly, it has to be determined the place in which the most important decisions regarding the business are effectively taken. In this respect, the use of administrative offices outside the Italian territory as the domicile of the company, or for the carrying out of all the administrative services (book keeping, accounting and similar) could be considered proof of the effective management and, consequently, of the company residence in such state for tax purposes.

According to the Italian Tax Authority, even the place where the contracts are entered into must be taken into consideration to determine the company's tax residence in Italy. Therefore, proxies and powers of attorney for entering into contracts granted to individuals resident in Italy for tax purposes are also taken into account.

The place where banking and financial transactions are performed is also considered as notable by the Italian Tax Authority. In this respect, the company is deemed to have its place of management in Italy in the following situations: opening of bank accounts with Italian banks, or authorisation to Italian resident individuals to operate such bank accounts.

These elements can be evaluated by the Italian Tax Authority as evidence that the company's banking and financial management is performed in Italy.

Finally, it is important to note that the evaluation of the effective place of management of a company cannot be appraised within the ordinary advanced ruling procedure provided for by article No. 11 of Law 212/2000. Indeed, such evaluation requires the analysis of several facts related to the connection between the company and the territory, and cannot be appraised under the ordinary ruling procedure which is instead aimed to address cases of objective conditions of uncertainty about the interpretation of a tax provision.

Avoidance targeted

The new provisions are aimed at limiting the abuse of REIFs for the purpose of carrying out private or family investments in real estate assets. Such provisions are coupled with the tax residence presumption, that follows a recent trend of measure designed to counteract the abuse by Italian resident of foreign vehicles for the purpose of holding Italian assets.

The combined provisions, and in particular the annual 1% tax on the REIF's net asset value, are likely to discourage the setting up of new captive or family structures, and will lead to the restructuring of existing arrangements so they fall outside the scope of the new rules.

Paolo Giacometti



Chiomenti Studio Legale

Tel: +39 02 721 57651 (Milan); +44 207 569 15 00 (London)

Fax: +39 02 721 57227 (Milan); +44 207 569 15 01 (London)



Paolo Giacometti is a partner in the tax department of Chiomenti Studio Legale, based in the Milan and London offices. His practice focuses on a broad range of domestic and international tax issues connected to corporate restructurings, M&A, capital markets and structured finance transactions. He is a frequent lecturer at tax seminars and a contributor to various domestic and international tax publications.

Massimo Antonini



Chiomenti Studio Legale

Via Verdi, 2

20121 Milano - Italy

Tel: +39 02 721 57436

Fax: +39 02 721 57224



Massimo Antonini is a partner in the tax department of Chiomenti Studio Legale, based in the Milan. He advises on all areas of tax law, with particular emphasis on international taxation, cross-border M&A, tax litigation, trusts and estate tax planning. He frequently lectures at post graduated masters and seminars, both in Italy and abroad.

He has also written extensively on international taxation matters, with particular focus on permanent establishment, tax residence, and trusts. He is a member of the Italian Fiscal Association and was Italian national reporter for the IFA Congress 2006.

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