Tax incentives for investors in venture capital funds
New tax incentives have been provided by Italian law to promote investment into venture capital funds.
The introduction of these tax incentives was subject to the issuance of an implementing decree by the Italian Ministry of Finance and the authorization of the European Commission.
Both measures have been issued and the new incentives became effective on 28 February, 2013.
Investors receiving profits from investments in venture capital funds are entitled to benefit from a 20% withholding tax exemption, provided that certain conditions and requirements are met with respect to the funds and investors.
Requirements for venture capital funds
The 20% withholding tax exemption will apply to investors with investments in venture capital funds which meet all the following requirements:
a) The venture capital funds shall be represented by Italian “collective investment undertakings” (“organismi di investimento collettivo del risparmio”) or foreign venture capital funds located in a member State of the European Union or in a State which is a party to the agreement on the European Economic Area, provided that the State is not part of the Italian black list issued by the Italian Ministry of Finance.
b) According to its internal regulations, the venture capital fund shall have invested at least 75% of its assets in target companies with the following characteristics:
- non-listed companies;
- companies qualified as “small and medium-sized” enterprises pursuant to the EU Recommendation 2003/261/EC of May 6, 2003;
- business office (“sede operativa”) located in Italy;
- majority of shares or quotas held directly by individuals;
- companies subject to corporate income tax or similar tax in their local jurisdiction;
- companies carrying out business activity for no longer than 36 months;
- turnover not exceeding EUR50,000,000.00 according to annual financial statements approved prior to the investment by the venture capital fund.
c) The investment made by the venture capital fund in each target company must be less than EUR2,500,000.00 during a twelve month period.
Venture capital funds launched after the issuance of these new provisions of law, or those that were already active at the time of their entrance into force, will have a grace period of one year to adjust their regulations to the new rules.
Requirements for investors
Investors will be entitled to benefit from said withholding tax exemption provided that:
- they are qualified as “professional investors”; or
- having met certain requirements, they may be regarded as “professional investors”; or
- they are individuals or entities which meet the following requirements:
- they undertake to invest at least EUR100,000.00;
- they declare in writing that they are aware of the risks connected to the prospective investment;
- the management company of the venture capital fund assesses the competence, experience and knowledge of the investor with respect to the prospective investment;
- the same management company is reasonably confident that the investor is able to take autonomous investment decisions and understand the related risks, and that the relevant investment is appropriate to the investor;
- the management company confirms in writing that it has performed the assessment under ‘c’ above, and that the conditions under ‘d’ above are satisfied.
Documentation duties for venture capital funds
Should all the above-mentioned requirements be met, the venture capital funds shall comply with the following duties:
- for Italian tax resident venture capital funds, appropriate accounting reports giving evidence of the executed investments shall be made available to the relevant tax authority for a five year statutory period;
- for venture capital funds tax resident in EU member States or in States belonging to the European Economic Area and not “black listed” pursuant to Italian law, in addition to the reports under ‘a’ above, a copy of their internal regulations and any further amendments shall be made available to the relevant tax authority for a five year statutory period.
 Law Decree No. 98 of July 6, 2011 converted into Law No. 111 of July 15, 2011.
 Reference is made to (i) the Decree of the Ministry of Finance and Economy dated December 21, 2012 which wwas published in the Official Gazette No. 50 of February 28, 2013 and (ii) the decision of the European Commission dated September 17, 2012 which declared the Italian provisions of law in line with European market rules.
 According to this Recommendation “small enterprises” are those enterprises (i) employing less than 50 individuals and (ii) showing in the yearly financial statements a turnover not exceeding EUR10,000,000.00 while “medium-enterprises” are those enterprises (i) employing less than 250 individuals and (ii) showing in the yearly financial statements a turnover not exceeding EUR 50,000,000.00.
 Please note that in any event this limitation shall be in compliance with the EU Guidelines on State aids promoting risk capital investments in small and medium-sized enterprises set forth in COM 194/2006 and subsequent amendments.
 Such as banks, insurance companies and investment companies, pension funds and other companies exceeding certain financial thresholds pursuant to section I – Annex II of EU Directive 2004/39/EC.
 Reference is made to those investors (individuals or entities) that, pursuant to section II – Annex II of EU Directive 2004/39/EC, meet at least two of the following requirements:
(i) carry out transactions of significant size in the relevant financial market at an average frequency of ten operations per quarter over the previous four quarters;
(ii) have a financial portfolio, including cash deposits and financial instruments, exceeding EUR500,000.00;
(iii) currently work, or have worked in the past. in the financial sector for at least one year in a professional position requiring significant knowledge of financial transactions or services.
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