|Nicola Saccardo||Marco Valdonio|
On March 30 2016 the Italian Revenue Agency issued comprehensive guidelines on the tax treatment of leveraged buyout transactions (LBOs) and similar acquisition structures, with a particular reference to investments by private equity funds.
The guidelines are meant to bring clarity for the benefit of foreign investors and address, among others, the following subjects: interest deduction, deduction of fees charged to the acquisition vehicle or the target company, deduction of input VAT on such fees, carry forward of tax losses following a merger, withholding taxes on interest payments, tax regime of shareholders loans and of capital gains on shares or dividends upon exit. Here we report on some of the important points laid down in the guidelines.
The Revenue Agency has been used to challenge interest deduction in LBOs relying on different legal grounds, including the abusive nature of the allocation of the debt to the Italian acquisition vehicle. In the guidelines the Revenue recognises that the interest expenses incurred by the Italian acquisition vehicle are in principle deductible, save for certain exceptions where abuse can be identified (for example, in case of maintenance of control by the same direct or indirect shareholder). This conclusion is held valid irrespective of the residence of the shareholders (subject to the comments below regarding shareholders' loans). The guidelines invite the tax offices to review pending litigations in the light of such principles.
The guidelines further indicate that the Revenue will adopt a substance-over-form approach to re-characterise shareholders' loan as equity. Specific criteria that will be used for such purpose are listed. The Revenue holds that penalties for infringements committed before the issuance of the guidelines may not apply and that the deduction for the notional remuneration for equity would apply in the event of re-characterisation.
The guidelines also address the application of treaty benefits on the capital gains on shares, realised upon exit by non-resident companies established by foreign funds in tax-friendly jurisdictions. Particularly, they clarify that treaty benefits will be denied to the shareholders in the case of either a 'light' organisational structure of such companies or the pure mirroring nature of their sources and uses. Clarifications on how these tests will be performed are set out in the guidelines.
The guidelines will have to be taken into due account while structuring new acquisitions and assessing the need to restructure any existing structure due to potential exposures.
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