A general introduction to real estate M&A and private equity in Italy

All questions

Overview of the market

In 2022, the Italian economy showed a capacity for recovery exceeding market forecasts and expectations.² Although economic activity weakened in the last months of the year, mainly due to the slowdown caused by the rise in energy prices (which accounted for more than half of the increase in inflation),³ the volume of investment in Italy during the year reached €11.7 billion, an increase of 20 per cent compared to 2021,⁴ driven by the excellent performance of logistics and the renewed interest in offices.⁵

In particular, offices was the leading asset class, preferred by both domestic and international investors, registering an investment volume of about €4.6 billion in 2022 (Milan attracted 79 per cent of it) and a growth of 103 per cent compared to 2021. Tenants increased their preference for grade A/A+ offices, which represented 80 per cent and 48 per cent of the total take-up in, respectively, Milan and Rome.

Logistics attracted 24 per cent of the invested volumes (€2.9 billion), totalling a 6 per cent growth compared to 2021, positioning itself as the second leading player.⁶

With investments of around 1.6 billion, the hotels asset class ranked third in terms of volume invested in Italy.⁷ This upturn was mainly seen in the upper upscale market, from luxury to extra-luxury, where the high purchasing power of the most affluent customers, especially those with an international background, helped to offset rising operating costs due to inflation and energy costs. The divergence between the high intensity of tourist activity and the ageing hotel infrastructure presents an attractive investment opportunity in the Italian market, particularly in Rome. The upgrading or conversion of ancient and historic buildings for hospitality purposes is gaining traction, with the entry of international hotel chains helping to raise quality standards. This is in line with the growing demand from institutional investors and industry operators for compliance with environmental, social and governance (ESG) sustainability principles.⁸

Milan and Rome remain the most dynamic cities. Rome, in particular, is expected to seize important opportunities in the future, also thanks to expected events such as the Jubilee and the Ryder Cup, as well as the candidacy for Expo 2030. Milan is expected to continue seeing major regeneration projects and developments, which are also connected to the 2026 Winter Olympics, attracting the attention of major real estate players around the world.

Private sources of capital continue to dominate the Italian real estate industry, while publicly traded real estate vehicles play a relatively minor role. In 2022, the trend of a consistent decline in the number of real estate companies listed on the main market persisted, alongside significant growth in the unregulated segment. Nevertheless, the recent listing of Eurocommercial Properties NV on the regulated market Euronext Milan, organised and managed by Borsa Italiana, appears promising.

On the financing side, private debt is playing an increasing role in financing real estate transactions. Non-bank lenders, such as private equity firms, hedge funds, credit funds and specialised lending institutions, have gained prominence thanks to the ability to structure customised financing solutions tailored to the specific needs and circumstances of the borrower and the transaction (often using hybrid structures).

Investors in the Canadian real estate market

Recent market activity

i M&A transactions

In past years the Italian real estate market has been particularly active in terms of M&A transactions, with large-ticket deals involving leading domestic and international players, including the following transactions:

1. ‘Back2bonis’ investment fund, ‘Risanamento’ group and ‘Lendlease’ group co-invested in a urban regeneration project of an area south-east of Milan (‘Santa Giulia’), with an estimated final value of €2.5 billion, up to 2,500 new residences and a new business district for offices, retail and entertainment, including the construction of a new multifunctional arena that will host the Milan-Cortina 2026 Winter Olympic Games;
2. Hines, Cale Street and Prelios SpA co-invested in the redevelopment of the areas known as ‘Milano Sesto’ with a total gross area of about 1.45 million square metres;
3. CDP Equity SpA (indirectly controlled by the Italian Ministry of Economy and Finance) and some of the main Italian financial institutions entered into Webuild’s share capital, implementing the so-called ‘Progetto Italia’ aimed at the consolidation of the construction sector in Italy. A key milestone of Progetto Italia has been the partial and proportional demerger transaction involving Webuild SpA and Astaldi SpA, two of the biggest multinational construction companies based in Italy, which resulted in the separation between Astaldi’s continuity business and its integration into Webuild, and the assets and debts destinated to Astaldi’s creditors, retained by the demerging company;
4. Logistics Capital Partners, a leading pan-European logistics development and asset management platform, developed the then first carbon neutral accredited logistics development in mainland Europe (1.75 million square feet/163,000 square metres) and sold it to Midas International Asset Management, a leading Korean investor in recent European logistics transactions, and Hana Financial Investors, one of the largest financial institutions from Korea; and
5. Investindustrial acquired a 52 per cent stake in Eataly SpA, through the purchase of shares from existing shareholders and the subscription of a share capital increased aimed at boosting the growth of the globally renowned Italian grocery and restaurants store.

ii Private equity transactions

In the past few years, some of the most prominent domestic and international PE firms have deployed considerable resources in the Italian real estate market, including the following transactions:

1. Coima Sgr, Covivio and Prada set up a joint venture for the acquisition and requalification of the ex-railway station of Porta Romana in Milan, on which the Olympic Village will be built to host the 2026 Milan-Cortina Olympic Games, with the overall value of the project equal to approximately €1 billion;
2. Blackstone acquired, for an overall value of more than €1 billion, a 70 per cent stake in the Italian real estate company Reale Compagnia Italiana SpA, owner of 13 trophy assets in Milan and one in Turin, and subsequently launched a public offering for the acquisition of the remaining shares (completed in 2022);
3. Evergreen launched a voluntary public tender and exchange offer on all of the ordinary shares of Coima RES SpA SIIQ, with the strategic objective of its delisting to accelerate the growth of Coima’s real estate portfolio in the office and commercial real estate segment, on the back of the growing demand for prime sustainable properties; and
4. BentallGreenOak sold to Reale Immobili SpA its 100 per cent stake in the real estate fund GO Italia IV owning a real estate complex located in Piazzale Flaminio in Rome.

Real estate companies and firms

i Publicly traded REITs and REOCs – structure and role in the market

Although under Italian law there is no investment vehicle that may be specifically qualified as REITs or REOCs, the Italian real estate market provides for similar structures that can be considered when planning an investment through a publicly traded entity. Such structures may be divided between real estate companies and collective investment undertakings.

As regards the first group, the most significant investment vehicle is the SIIQ.

On the other side, investments through Italian collective investment undertakings typically involve real estate investment companies with fixed corporate capital (known as SICAFs) and real estate alternative investment funds (known as REIFs), with the latter representing the most popular choice among institutional investors.

An additional investment scheme recently offered to sophisticated investors in the Italian real estate market is represented by real estate securitisations.

SIIQs

SIIQs are joint-stock companies resident in Italy whose stocks are listed on the Italian Stock Exchange, or on regulated markets of EU or EEA States, and are subject to the supervision of Consob (the body monitoring the Italian Stock Exchange). SIIQs benefit from a special tax regime, provided that certain requirements are met:

1. no single shareholder must hold, directly or indirectly, more than 60 per cent of the voting rights; and at least 25 per cent of the stocks must be held by shareholders who, individually, do not represent more than 2 per cent of the voting rights and the participation in profits;
2. the main business carried out by an SIIQ is represented by the leasing of real estate assets;
3. SIIQs must be resident for income tax purposes in Italy;
4. at least 80 per cent of the total assets must consist of real estate assets to be leased and participations accounted as fixed assets in other SIIQs, SIINQs and Italian REIFs or SICAFs, which in turn hold real estate for lease or participations in other real estate investment companies, REIFs or SICAFs representing at least 80 per cent of the respective total assets (qualifying REIFs and SICAFs); and
5. in each financial year, at least 80 per cent of the positive components of income must be represented by proceeds from lease activity, dividends from leasing activity raised from participations in SIIQ, SIINQ and qualifying REIFs and SICAFs, and capital gains realised on real estate held for lease or in participations in SIIQs, SIINQs and qualifying REIFs and SICAFs.

In addition, SIIQs shall distribute each year at least 70 per cent of the lower of net profits generated from leasing activities or from participations in other SIIQs, SIINQs and qualifying REIFs and SICAFs, and total profits available for distribution. Furthermore, SIIQs shall distribute to their shareholders at least 50 per cent of the capital gains deriving from the disposal of real estate properties held for lease or from participations in SIIQs, SIINQs and qualifying REIFs and SICAFs in the two years following on from the relevant disposal.

SIIQs’ income deriving from a leasing activity is exempt from corporate income tax (IRES) and regional tax on business activities (IRAP), while other income is subject to the ordinary IRES and IRAP regime.

Dividends deriving from SIIQs’ exempt leasing activity are subject to a 26 per cent withholding tax on distribution. Non-resident shareholders may benefit from double tax treaties, if applicable. A specific exemption is provided for Italian pension funds and Italian undertakings for collective investments. Dividends deriving from different activities are subject to the ordinary tax regime depending on the recipient.

Despite a favourable tax regime, as of today there are only a few SIIQs listed on the Italian Stock Exchange.⁹

The same tax regime applies also to SIINQs, which are joint-stock companies, Sapa or Srl (limited liability companies), with a minimum share capital of €50,000, whose shares are not listed, resident for tax purposes in Italy, whose main activity is the rental of real estate properties (the asset test and profit test mentioned above), and owned by an SIIQ (or SIINQ) that individually owns more than 50 per cent of the voting rights and of participation in profits or, alternatively, by an SIIQ (or SIINQ) owning with other SIIQs (or SIINQs) or qualified real estate funds, 100 per cent of participation in the share capital, as well as voting rights and participation in profits (provided that at least 50 per cent is owned by the SIIQs or SIINQs).

SICAFs and REIFs

Undertakings for collective investment in the real estate sector can either be corporate vehicles such as joint-stock companies with fixed capital (known as SICAFs) or contractual vehicles such as alternative REIFs. Both of these vehicles are subject to the EU legal framework set out in the Directive on Alternative Investment Fund Managers.¹⁰

The main features of these investment structures may be briefly summarised as follows.

1. With particular reference to REIFs:
   • funds of the relevant vehicle shall be collected from a variety of investors through issuance, or the offer of shares or units;
   • these vehicles have a limited scope provided by applicable laws and regulations (e.g., they are not entitled to directly carry out building activity), and the relevant assets shall be invested on the basis of an investment policy defined ex ante;
   • investors act as passive investors and can be involved only with respect to certain main investment decisions, as the management powers are exercised independently by an external regulated alternative investment manager. An exception is made for internally managed SICAFs directly managed by a board of directors whose members are appointed by the relevant shareholders. The investors’ involvement in the decision-making process and the functioning of the vehicle is regulated under the fund regulation (in the case of REIFs) or the by-laws (in the case of SICAFs); and
   • the incorporation and setup of these vehicles is subject to prior approval by the Bank of Italy (except for REIFs exclusively offered to professional and qualified investors), and their operations are supervised by the Bank of Italy and Consob.
2. With particular reference to real estate SICAFs:
   • they may be qualified as non-reserved or retail when their shares may be subscribed by retail investors, or as reserved, in cases where the investment in such vehicle is limited to Markets in Financial Instruments Directive professional clients and non-professional clients investing at least €500,000 or, provided that certain conditions are met, at least €100,000;
   • the main business carried out by real estate SICAFs is to provide collective asset management through investment in the acquisition of real estate and property rights, as well as in real estate funds, real estate SICAFs or SIIQs, which shall represent, in aggregate, at least two-thirds of the overall assets of the vehicle;
   • real estate SICAFs can be either externally managed (likewise for REIFs) by an alternative investment manager, or internally managed. In this latter case, the SICAF generally has a governance structure reflecting the presence of business shareholders (which participate, for management purposes, providing the SICAF with its management and organisational structure and with the financial resources needed to carry out its business and meet the regulatory capital requirement) and investor shareholders (who are granted the voice rights generally recognised for the investors in the funds). Alongside the described management structure, the business operations of the SICAFs also involve banks acting as depositary agents, external auditors to certify the SICAF’s financial statement as well as independent experts appointed to provide evaluations of the real estate assets owned by the company;
   • unlike SIIQs, no listing requirement is provided with respect to real estate SICAFs; and
   • specific restrictions to leverage recourse apply with respect to retail real estate SICAFs (i.e., a maximum permitted ratio between exposure and the net asset value equal to two), while no specific limitations apply to reserved SICAFs, with an exception being made for those provided under a company’s by-laws.

REIFs have several elements in common with SICAFs since, as mentioned above, they are both collective investment undertakings subject to the regulatory framework, although SICAFs must also comply with ordinary corporate law provisions set forth under the Italian Civil Code.

REIFs’ most distinctive characteristics, compared to real estate SICAFs, can be summarised as follows:

1. investment funds under Italian law lack legal personality and are able to operate only through a separate and independent management company; therefore, real estate funds can only be externally managed; and
2. unlike the incorporation of a SICAF, the setup of investment funds reserved for professional investors is a very smooth process, as it does not require any prior authorisation from the regulatory authorities.

Both REIFs and SICAFs, as collective investment undertakings, are subject to the EU legal framework set out in the Regulation on sustainability‐related disclosures in the financial services sector, or the Sustainable Finance Disclosure Regulation.¹¹ Therefore, as part of the governing documents of these products as well as in the pre-contractual information and periodic reports to be made available to investors, relevant information regarding the degree of sustainability of the product should be provided, depending on the level of classification assigned to the REIF or the SICAF, or both, by the alternative investment manager.¹²

From a tax perspective, REIFs are exempt from IRES and IRAP if they satisfy the regulatory requirements to be considered as investment funds under Italian law and, in any case, if they are participated in exclusively by institutional investors (e.g., undertakings for collective investments and pension funds established in White List countries, and vehicles more than 50 per cent owned by any of the aforementioned entities). The same tax treatment applies to SICAFs, with some differences for IRAP purposes.

The European Court of Justice recently stated that a domestic rule providing that non-resident investment funds are liable to tax in respect of income deriving from real estate assets in that state, whereas resident investment funds are exempted, is not compliant with the EU principle of free movement of capital (Article 63 of the Treaty on the Functioning of the European Union (TFEU)).¹³ This decision may be relevant when structuring cross-border direct investments of EU funds in real estate assets located in another Member State.

Proceeds distributed by REIFs and SICAFs to non-resident investors are subject to a 26 per cent withholding tax, which may be reduced under double tax treaties, if applicable, under Article 11 – ‘interest’. A domestic exemption from withholding tax is provided for certain non-resident investors (including undertakings for collective investment established in White List countries).

It is worth mentioning that the 2023 Budget Law¹⁴ amended the permanent establishment provision set out by Article 162 of the Italian Income Tax Code with reference to asset managers in Italy of foreign investment vehicles.¹⁵ Accordingly, the activities carried out in Italy by the asset managers do not give rise to a permanent establishment if certain conditions are met.

Lastly, the Italian Revenue Agency recently clarified that the merger of REIFs established under Italian law and managed by the same Italian alternative investment fund manager (SGR) qualifies as a neutral transaction for transfer taxes, VAT and income taxes purposes.¹⁶

Real estate securitisation

In 2019, Italy extended securitisations to real estate: SPVs meeting certain requirements can carry out securitisation of proceeds arising from real estate and related rights.

Real estate and related rights underlying a securitisation constitute a pool of assets segregated from the other SPV’s assets. The securitised assets are segregated in favour of the SPV’s investors, counterparties of the derivative contracts signed by the SPV for hedging purposes and grantors of the funds raised by the SPV.

Said SPVs will not need to be regulated and shall have as their corporate purpose the acquisition, management and valorisation of real estate and registered movable assets in the exclusive interest of the securitisation transaction. The management of the pool of assets in the interest of the noteholders shall be carried out by entities that shall not necessarily be regulated asset managers (pursuant to the AIFM Directive¹⁷ and its implementing provisions).

From a tax perspective, the Italian Revenue Agency clarified that real estate securitisation SPVs are exempt from IRES and IRAP, given that the profits deriving from the real estate activity are a separate pool of assets, not constituting income attributable to SPVs.¹⁸

Upon the conclusion of the securitisation, any outstanding income arising after all the creditors of the segregated assets and noteholders have been satisfied would be subject to income taxes (IRES and IRAP) in the hands of the SPV.

Interest and other profits paid by a real estate SPV to non-resident noteholders, in principle, are subject to a 26 per cent withholding tax in Italy. However, a domestic exemption from withholding tax applies to entities resident for tax purposes in White List countries and to institutional investors established in White List countries.

ii Real estate PE firms – footprint and structure

A number of PE firms invest actively in the Italian real estate market through structured investment schemes including REIFs and externally managed SICAFs established under Italian law. Most frequently, such investors are leading PE operators with a worldwide presence focusing on large portfolios with a value-added strategy.

Recent trends

Transactions

i Legal frameworks and deal structures

In the Italian market, real estate deals are typically structured either as share deals, where the investor acquires an interest in an entity owning real estate, or as asset deals, which entail the direct acquisition of real estate. The reason to prefer one investment scheme over the other may lie in a number of elements. This choice may carry major consequences in terms of process, timing, tax regime and potential liabilities of the investor.

Asset deal

Asset deals are usually simpler than share deals as, in such a case, the purchaser does not take over the liabilities and contracts of the seller, except for certain specific tax liabilities and certain contracts that are transferred by operation of law together with the property (e.g., lease agreements). Therefore, the relevant legal due diligence may be limited only to certain matters, including:

1. title of ownership;
2. existing encumbrances;
3. compliance of the property with applicable laws;
4. main terms and conditions of the relevant lease agreements (if any); and
5. assessment of the regular fulfilment of obligations concerning the payment of certain indirect taxes related to the real estate, which may give rise to a real estate lien provided by law.

On the other hand, asset deals entail certain complexities, as they need to comply with certain acquisition formalities provided by law. For example, a transfer deed shall include certain mandatory provisions (e.g., declaration on the cadastral and building compliance of the asset transferred) and, for the for the purposes of its enforceability in relation to third parties, shall be notarised and recorded in real estate registries.

Share deals

With respect to share deals, as the investor acquires an interest in the entity owning the real estate, it assumes, indirectly, all the risks relating to the previous operation of the business exercised by the target. Therefore, this investment structure usually requires a broad due diligence activity to investigate, in addition to the technical real estate matters mentioned above with respect to asset deals, a number of aspects relating to the target entity, including an analysis of the corporate documentation and agreements, which may provide for restrictions to the transfer of shares or units jeopardising the transaction, employment relationships and intellectual property (IP) rights held by the target (especially when investing in the hotel industry).

Share deals also require broader tax due diligence on the whole target entity (e.g., formalities related to tax returns, payment of direct taxes and other specific issues for real estate companies).

Additional specific aspects to be addressed by the investor may be the following:

1. governance: following the execution of a transaction, the investor may need to restructure the governance, including through the replacement of the members of the management body and the release of responsibilities in relation to the resigning directors;
2. change of control: clauses pursuant to which a change in the shareholding resulting from the transaction may trigger the termination of agreements potentially crucial for the entity’s operations; and
3. group reorganisation: the investor might need to carry out certain post-closing activities to achieve a functional group structure or to pursue certain tax efficiencies, or both.

Apart from specific considerations on the applicable tax regime, the structure of a share deal may offer certain benefits; for example, dividends and capital gains derived from shareholding in Italian companies in Italy are not subject to taxation when received or realised by foreign UCIs compliant with the UCITS Directive¹⁹ and foreign UCIs established in EU Member States whose manager is subject to regulatory supervision pursuant to the AIFMD Directive.

Moreover, the acquisition of an interest in the target may allow the investor to avoid the application of certain requirements relating to the transferability of the real estate connected to compliance with the law and to cultural or historical interests (possibly entailing a pre-emption right in favour of the competent authorities).

Compared to those required for an asset deal, acquisition formalities to be met in a share deal are less burdensome. While in the case of an acquisition of interests in a limited liability company the transfer shall be notarised and filed with the competent company register, if the target is a joint-stock company, the transfers are made by means of endorsement. Moreover, when a joint-stock company is listed in a stock exchange, the trading does not require specific acquisition formalities and may be completed through licensed intermediaries.

When the transaction consists of the acquisition of a qualified interest in a public entity listed in a regulated market (such SIIQs and listed REIFs), additional formalities and incisive restrictions relating to tender offer regulations will apply.

ii Acquisition agreement terms

The typical structure of the acquisition agreements entered into in real estate transactions are quite similar both in the case of asset deals and share deals, regardless of the type of investor involved.

Scope

In asset deals, the definition of the exact scope of a transaction requires a precise cadastral identification of the real estate. As the performance of such activity entails the analysis of cadastral registries, an investor may benefit from the support of a public notary and of technical advisers. Such consideration applies also to share deals relating to M&A and real estate transactions as the ultimate assets acquired are real estate.

Price

When directly purchasing real estate, the purchase price is usually determined ex ante as a fixed amount based on a number of factors such as the expected profitability of the property. The mechanics to determine the purchase price of a target entity are usually less straightforward. They are frequently subject to various forms of adjustments to be carried out post-closing, mainly to reflect the business performance of the target between the time the purchase price is agreed upon and the date of closing.

Representations and warranties

The set of representations and warranties typically requested in M&A and real estate transactions covers:

1. full title of ownership;
2. absence of encumbrances and liens, such as mortgages, easements and pre-emption rights;
3. validity and effectiveness of lease agreements;
4. compliance of the property with applicable laws;
5. fulfilment of tax obligations; and
6. absence of litigations.

In the context of a share deal, a customary set of representations and warranties may also include the following:

1. power and capacity of the seller;
2. employment matters and social security compliance;
3. validity and effectiveness of main agreements;
4. accuracy, correctness and completeness of financial statements; and
5. commercial licences and IP.

Indemnity obligations

With respect to indemnity obligations, there are no significant differences between asset and share deals. Save for those relating to breach of representations and warranties covering title of ownership and tax liabilities, the duration term of the indemnity obligations usually ranges between 12 and 24 months.

It is worth mentioning that over the past few years, warranty and indemnity insurances have experienced remarkable growth in the Italian real estate market as they allow a clean exit for the seller.

iii Hostile transactions

Owing to a number of factors relating to both structural and subjective characteristics, in recent years the Italian market has not experienced hostile transactions concerning the real estate industry.

iv Financing considerations

Although the structure of real estate financing transactions is usually standard, certain peculiarities may be observed depending on the structure of the transaction.

In asset deals, the loan is granted directly to the purchaser, as borrower, through a mortgaged medium-term loan facility agreement. Subject to certain legal requirements, this allows lenders to benefit from a significant reduction of the consolidation period of the mortgage for the purposes of the clawback period under Italian insolvency law. Additional security interests, such as the assignment by way of security of receivables arising out of the transaction documents or a pledge over the bank accounts of the borrower, usually assist the financing.

In share deals, a transaction is normally structured as a merger leveraged buyout pursuant to Article 2501 bis of the Italian Civil Code. Accordingly, a loan is granted to an SPV incorporated for the purposes of the acquisition of the target and, indirectly, the real estate. Pursuant to Italian law provisions on financial assistance preventing a company from (directly or indirectly) granting loans or guarantees for the purchase or subscription of its shares, at closing, lenders cannot benefit from any security interests over the target’s real estate and its cashflows. The financing transaction is thus structured in two stages:

1. a first stage during which the acquisition loan is granted to the SPV and is only secured by an assignment by way of security of the receivables arising out of the transaction documents, including any shareholder loan granted by the investors in the SPV to finance the equity portion of the purchase price, and a pledge over the shares of the SPV and upon completion of the acquisition over the shares of the target; and
2. a second stage, starting upon completion of the merger leveraged buyout between the SPV and target to be performed within a limited period after closing, during which the security package includes also a first ranking mortgage over the real estate, a pledge over the bank accounts on which cashflows are credited and an assignment of the receivables arising out of any lease agreement relating to the property and insurance policy covering the same.

Should the real estate owned by the target be already mortgaged to secure any existing loan previously granted to the vendor, the financing structure usually provides also for the repayment in full of the existing loan and cancellation of the relevant existing mortgage at closing.

v Tax considerations

The indirect taxes regime applicable to the purchase of real estate located in Italy depends on the characteristics of the seller, on whether the property qualifies as commercial or residential and on the renovation works executed by the seller.

For VAT purposes, assuming that the seller is registered for VAT in Italy and a transaction involves a commercial property, the purchase would be:

1. compulsorily subject to VAT (at 10 or 22 per cent without the reverse charge procedure) if the seller has construed the property or executed certain renovation works (specifically listed by the Italian building code) in the five years prior to the purchase; or
2. otherwise exempt from VAT or subject to VAT (at 10 or 22 per cent with the reverse charge procedure) by option of the seller. The application of the exemption may give rise to certain limitations with respect to the deduction of input VAT.

For transfer tax purposes, the purchase of commercial properties is subject to a fixed registration tax (€200) and to proportional mortgage and cadastral taxes (respectively 3 and 1 per cent).

The above-mentioned regime for VAT and transfer taxes purposes applies also to real estate securitisation SPVs.

Conversely, transfer taxes are reduced to one-half (respectively 1.5 and 0.5 per cent) if part of the transaction is an Italian REIF or a SICAF, or if the purchase is made by an SIIQ.

Based on EU and Italian Supreme Court case law,²⁰ such reduction should not apply in the case of an investment fund established under the laws of a foreign jurisdiction. However, the European Court of Justice has stated that such restriction is not compliant with the EU principle of free movement of capital.²¹ In light of this decision, the reduced transfer taxes should apply also to transactions carried out by non-resident real estate funds.

On the other side, share deals involving Italian real estate companies are not subject to VAT, and the related deed of purchase, if executed in Italy, is subject to a fixed registration tax (€200). Moreover, if a purchase involves the shares of an Italian joint-stock company, the financial transaction tax would apply at 0.2 per cent of the price of the shares.

For direct tax purposes, it is worth mentioning that the 2023 Budget Law amended the tax regime applicable to capital gains realised by non-resident investors from the sale of participations in Italian and/or foreign companies or entities whose value derives more than 50 per cent (also indirectly) from Italian real estate assets. Following the amendments, such gains would be subject to tax in Italy, unless a double tax treaty with Italy would provide for the exclusive taxation in the state of residence of the seller.²², ²³ The amendments do not apply to gains realised by undertakings for collective investment established in EU or EEA White list States, that either comply with the requirements set out by the UCITS Directive or are managed by a manager subject to regulatory supervision under the AIFMD Directive.

vi Cross-border complications and solutions

Investments in sectors deemed strategic for national security and defence are subject to government clearances and constraints (including the use of veto powers known as golden powers) to protect such sectors against foreign speculative acquisitions. Since the enactment of the golden powers framework in 2012, the government has broadened its scope also in response to the EU’s foreign direct screening framework and covid-19 pandemic emergency.²⁴ The extension includes covering transactions based on the investor’s profile (under certain circumstances,²⁵ investments carried out by EU or EEA nationals are also caught by the regime) and broadening the range of assets considered strategically important. Today, these strategic areas encompass a significant portion of the national economy, such as energy, transportation, communications, finance and healthcare. Consequently, transactions regarding key real estate assets connected to strategic infrastructure, even when the investor is from an EU or EEA Member State, fall under the jurisdiction of the government’s golden powers.

Furthermore, with the entry into force in May 2022 of the Law Decree No. 21/2022, the scope of the golden powers has been extended to transactions involving companies operating strategic real estate assets under a concession regime, including hydroelectric concessions, and to greenfield investments in strategic sectors.

Currently, no exercise of the golden powers by the government has been recorded with respect to the real estate development sector. However, it is still debated whether such ‘enhanced golden powers’ are likely to produce an actual impact in the Italian real estate market in the future in relation to the strategic destination of assets.

From a tax perspective, on 30 July 2020, Italy enacted, implementing an EU Council Directive, Legislative Decree No. 100, according to which intermediaries and taxpayers may be subject to disclosure obligations to tax authorities of EU Member States in the case of cross-border arrangements meeting certain ‘hallmarks’. In 2021, the Italian Revenue Agency issued public guidelines²⁶ to individuate the applicable hallmarks and regarding how to comply with the described duties.

Moreover, on 22 December 2021, the European Commission approved the proposal for a directive to prevent the misuse of shell entities for tax purposes (the Shell Entities Directive). When the Shell Entities Directive is adopted, it is necessary to verify whether, and to what extent, EU interposing entities of non-EU investors with no or minimal economic activity should be excluded from the application of, inter alia, favourable regimes concerning intra-EU dividends and interest.

Transactions – tax, legal, financing and regulatory considerations

Corporate real estate

The choice of corporate structure for acquiring a real estate asset is primarily influenced by three factors: the specific asset class involved, the intended development of the property in the future and the investor’s planned method of divestment.

While there is no single prescribed structure, a typical approach could involve establishing an Italian property company (propco) to acquire either the asset directly or the company holding the asset. The propco would operate as a subsidiary of a holding company (holdco), which would be situated according to the investor’s nationality. However, it is essential to consider tax and legal considerations to determine the most suitable structure.

In the past few years, a marked trend to separate corporate real estate from operating companies (opco/propco separations) has been observed, especially in transactions involving supermarket chains, shopping centres and hotels. In a number of cases, such separations are functional to a general reorganisation of the business, where the company originally owning the real estate transfers the same to another group company (a propco) and continues to operate the business within the property by means of a subsequent lease agreement executed with the propco.

In the case of acquisitions carried out though Italian REIFs, such separation is made due to regulatory constraints. Indeed, Italian REIFs may directly hold real estate assets (but not going concerns).

Outlook

The covid-19 health emergency and the commencement of the Russian–Ukrainian conflict in February 2022 have deeply impacted global economic growth, accelerating changes in all industry sectors, including real estate.

In the first months of 2023, the global economy continued to be affected by ongoing geopolitical uncertainty and high inflation in the major advanced economies. International institutions forecast a slowdown in global GDP for the year, albeit less severe than estimated in autumn 2022.²⁷

Nevertheless, investors remained active in the Italian real estate market. The volume of real estate investment in Q1 of 2023 was around €1 billion and, although this result reflects lower activity compared to previous quarters, it is above the estimates made at the beginning of the year.²⁸ As a result of the increase in construction costs caused by higher raw material prices, which led to a slowdown in development and renovation activities, in the coming months we can expect investors to focus on repositioning existing assets, with interventions requiring limited capital expenditure, limited use of leverage and a focus on the rental growth needed to maintain the profitability of their investments. According to the experts, the use of environmental sustainability certifications will be increased to attract tenants with ESG objectives, secure financing and preserve the value of assets over time, while the focus on developments in and around major urban regeneration areas will remain strong.²⁹

On 16 March 2023, the Council of Ministers approved a draft Delegation Law for the revision of the Italian tax system aimed at reducing the tax burden on taxpayers and the number of tax disputes, improving the relationship between tax authorities and taxpayers, and outlining an attractive system for foreign investors. The draft will be presented to Parliament for approval and within 24 months from the relevant entry into force the government will adopt the implementing decrees.