Spotlight: real estate M&A transactions in Italy

All questions

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.