To date, Italian non-listed companies have struggled to find efficient structures for debt issuances and have not found help in Italian law. However things have changed. Italy has passed final rules to greatly facilitate access to the corporate bond and commercial paper market for Italian private companies whose equity securities are not listed ("Non-Listed Companies") . The new rules resolve most of the tax and corporate issues that have obstructed access to, or increased the cost for, corporate bonds and commercial paper for Non-Listed Companies.
Law Decree no. 83 of June 22, 2012 on "Urgent Measures for Growth of the Country" (the "Decree") was converted into law (with some amendments) by the Italian Parliament on August 3, 2012. The conversion law is shortly due to be published in the Italian Official Gazette and will become effective on the day after its publication.
The Decree establishes two new regimes for debt issuance for Non-Listed Companies: a relatively simple regime for those Non-Listed Companies that list the corporate bonds on a regulated market or on multilateral trading facilities (a "Qualified Exchange")  which confirms the proposed rules in the Decree, and a more complex regime for those Non-Listed Companies that intend to issue commercial paper.
Regime for Corporate Bonds Listed on a Qualified Exchange
The Decree introduces significant advantages for Corporate Bonds issued by Non-Listed Companies:
Deductibility of interest paid
Disapplication of corporate "thin-cap rule"
Exemption from withholding tax on interest for investors resident in "white-listed" countries
Deductibility of Interest Paid on Corporate Bonds: The Decree provides for the deductibility of interest paid on corporate bonds issued by Non-Listed Companies after June 26, 2012. In order to fully deduct interest paid, such securities must be subscribed for by Qualified Investors  that are not, directly or indirectly, shareholders of the issuer. Failure to comply with such conditions would limit deductibility of interest paid in an amount not exceeding twice the official base rate. We note that the general tax rule that limits the deductibility on interest to 30 percent of EBITDA still applies.
Corporate "thin-cap rule" no longer applies: Prior to the Decree, Non-Listed Companies were restricted by article 2412 of the Italian Civil Code in issuing corporate bonds in an amount not exceeding twice the value of the capital and reserves of the issuer available for distribution (this restriction also applied in most cases to guarantors of such corporate bonds) and were subject to very limited exceptions. The Decree now exempts Non-Listed Companies issuing corporate bonds listed on a Qualified Exchange from such limitation, thereby granting them the same treatment enjoyed by listed companies in Italy .
The exemption to the corporate "thin-cap rule" also applies to convertible or exchangeable bonds, whether or not listed on a Qualified Exchange.
Withholding tax on interest reduced to zero for investors resident in 'white-listed' countries: Prior to the Decree, Non-Listed Companies had great difficulty in structuring corporate bond issuances without either being subject to a withholding tax on interest and other payments (at a rate of between 20% and 5% ) and/or being subject to a tax audit by Italian tax authorities.
The Decree grants Non-Listed Companies issuing corporate bonds listed on a Qualified Exchange the same withholding tax treatment enjoyed by listed companies in Italy under Legislative Decree no. 239 of April 1, 1996 ("Decree 239") and applies to corporate bonds issued after June 26, 2012. Decree 239 provides for an exception to the application of withholding or substitute taxes on interest and other payments to investors which are (a) beneficial owners resident in "white listed" countries, or (b) institutional investors, not subject to tax, established in 'white-listed' countries. We note that proper measures must be implemented to ensure that beneficial owners of interest payments certify that they are resident in a "white-listed country" for the purposes of Decree 239.
Subordinated Bonds and/or Bonds with Profit Participation
Under the Decree Non-listed Companies may issue corporate bonds with subordination clauses ("Subordination Provisions") and with profit participation provisions ("Participation Provisions") . The general rules applicable to other corporate bonds under the Decree (described above) also apply to corporate bonds with Subordination Provisions and Participation Provisions. The initial maturity of corporate bonds with Participation Provisions and Subordination Provisions must exceed 36 months.
The Subordination Provisions provided for in the Decree establish the subordination of bondholders vis-à-vis other creditors of the issuer and are similar to existing provisions under Article 2411, paragraph 1 of the Italian Civil Code.
Participation Provisions may provide a new and potentially useful instrument to finance Italian corporates. According to the Decree, Participation Provisions must have a fixed and a floating rate portion: the fixed portion of interest cannot be lower than the official base rate, while the floating rate portion must be calculated as a percentage of the issuer's profits , to be paid annually within 30 days from the date of approval of the issuer's financial statements (the "Participation Payment"). The Decree also confirms that Participation Payments are not subject to Italian usury law limitations.
The calculation of the Participation Payment must be based on objective criteria , must be established upon issue and cannot subsequently be amended. These elements differentiate Participation Provisions from dividends, which are resolved upon annually by companies on a discretionary basis. Another significant difference is the accounting treatment of corporate bonds with Participation Provision: to the extent a corporate bond with a Participation Provision also contains a Subordination Provision and envisages an undertaking not to distribute (other than by way of dividends) the issuer's share capital, the Participation Payment is deducted from the issuer's net income, thereby reducing the issuer's taxable income.
We expect that there will be significant discussion around these provisions of the Decree.
Regime for Commercial Paper
The Decree has significantly amended the regime for the issuance of commercial paper (cambiali finanziarie):
Deductibility of interest paid
Maturities extended from a minimum of 1 month to a maximum of 36 months
Issuance in dematerialized form
Deductibility of Interest Paid on Commercial Paper: The Decree provides for the deductibility of interest paid on commercial paper issued by Non-Listed Companies after June 26, 2012, subject to the same conditions applicable to corporate bonds, i.e. they must be subscribed for by Qualified Investors that are not, directly or indirectly, shareholders of the issuer.
Range of maturities extended: The range of maturities for commercial paper has been extended from a minimum of 1 month to a maximum of 36 months (increased from 3 to 12 months, respectively, before the Decree).
Issuance in dematerialized form: Significantly, prior to the Decree commercial paper could only be issued in paper form, while it may now be issued in dematerialized form.
To the extent the commercial paper is listed on a Qualified Exchange, Decree 239 should also apply , thereby providing an exception to the application of withholding or substitute taxes on interest and other payments to investors which are (a) beneficial owners resident in "white listed" countries, or (b) institutional investors, not subject to tax, established in 'white-listed' countries. The corporate "thin-cap rule" of article 2412 of the Italian Civil continues not to apply to commercial paper.
Commercial paper under the Decree may be issued by limited liability companies (società di capitali), cooperative companies (società cooperative) and mutual assurance companies (mutue assicuratrici) and is subject to the following conditions:
the issuance must be assisted by a sponsor (the Decree provides an exemption to this rule for large Non-Listed Companies ) which must be a bank, an investment company, an asset management company (SGR), a harmonized management company or an open-end investment companies (SICAV), in each case to the extent it has a branch in Italy;
the issuer's most recent financial statements must be audited by an qualified auditor or independent auditing firm; and
the commercial paper must be issued to, and intended to be traded exclusively among, Professional Investors  that are not, directly or indirectly, shareholders of the issuer.
A sponsor is required to: (a) assist the issuer in the issuance and the placement of the securities, (b) notify if the amount of commercial paper outstanding exceeds the issuer's "current assets" (as defined in the Decree); (c) upon issuance, provide a rating (to be made public) of the issuer's creditworthiness in one of five categories of risk ('strong', 'good', 'satisfactory', 'weak' and 'bad') to be matched, for guaranteed or secured transactions, with a corresponding level of guarantees or security ('high', 'normal' or 'low'); and (d) hold in its portfolio to maturity  of the commercial paper:
not less than 5% of the issuance value of the commercial paper for issuances up to Euro 5 million;
not less than 3% of the value for the portion exceeding Euro 5 million (up to Euro 10 million); and
not less than 2% of the value of the commercial paper exceeding Euro 10 million.
The Decree represents a significant and welcome liberalization of the corporate bond and commercial paper markets for Italian Non-Listed Companies. We expect that many Non-Listed Companies will, subject to market conditions, look to issue corporate bonds on a Qualified Exchange.
The Decree is particularly significant for Italian companies that may be affected by scarcity of bank credit as a result of the current credit crisis and the restrictions on credit which will result from the application of Basle III.
 Italian listed companies already enjoyed the benefits provided by the new rules under the legislation in force prior to the Decree, placing Italian Non-Listed Companies at a comparative disadvantage. The Decree does not apply to banks and micro-companies (defined by European Commission Recommendation no. 2003/361/CE defines micro-companies as enterprises which employ fewer than 10 persons and have annual turnover and/or annual balance sheet totals that do not exceed Euro 2 million).
 The Decree does not directly define "Regulated Market" or "multilateral trading facilities", however, such language is commonly used to refer to European MIFID Directive no. 2004/39/EC, which defines them as follows: (i) "Regulated market" means a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments - in the system and in accordance with its non-discretionary rules - in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly [….]" and (ii) "Multilateral trading facility (MTF)" means a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments - in the system and in accordance with non-discretionary rules - in a way that results in a contract [….]". Some of the most commonly used Qualified Exchanges include the Luxembourg Euro MTF and the Irish Global Exchange Market. For a list of current Qualified Exchanges, see mifiddatabase.esma.europa.eu.
 The Decree does not explicitly define 'Qualified Investors' or 'Professional Investors'. However, it is reasonable to argue that such terms should coincide with the definition of 'professional client' in CONSOB Regulation on Intermediaries no.16190 of 29 October 2007. Accordingly, 'Qualified Investors' and 'Professional Investors' would include, inter alia, (a) persons authorized and regulated to operate in financial markets, both Italian and foreign (e.g., banks, investment firms, other authorized and regulated financial institutions, insurance companies and pension funds); (b) large companies (e.g., companies satisfying at least two of the following requirements: total assets of at least Euro 20,000,000, net revenues of at least Euro 40,000,000 and capital resources of at least Euro 2,000,000); (c) institutional investors whose principal activity is investment in financial instruments, including companies dedicated to the securitization of assets; (d) other institutional investors who request to be treated as qualified investors; and (e) national and regional public entities. We would expect that a selling restriction limiting the subscription of corporate bonds to qualified investors would be included in the relevant underwriting agreements (and possibly in the terms and conditions of the corporate bonds). Similar restrictions are commonly included in contractual documentation for bond issuances in order to fall within the exemption from the "public offer" regime under Directive 2003/71/EC, as amended.
 Paragraph 26 of Article 32 of the Decree states that the exemption to the "thin-cap rule" applies to bond issuances "which are intended to be listed" on a Qualified Exchange. In theory, this would also allow a listing to be made post-issuance of the relevant bond. However, since most interpretations of Decree 239 require the bonds to be listed upon issue, we believe most issuers will seek to list bonds at the time of issuance in order to obtain the exemption from withholding provided by Decree 239.
 Pursuant to the general rule, the rate of withholding tax on interest payable to persons not resident in Italy is 20%, generally reduced to 10% under relevant double taxation treaties. Exemption to the application of withholding taxes exist only for (a) direct issuances by Italian listed companies under Legislative Decree no. 239 of April 1, 1996 or (b) indirect issuances by a special purpose non-Italian vehicles, where the funds raised are not repatriated into Italy. If the funds are repatriated into Italy, it is possible to mitigate withholding taxes (at a rate of 5% instead of 20%) on interest and other amounts paid by an Italian entity to a foreign associated issuer under Law 111 of July 15, 2011 if the bonds are listed. If the bonds are guaranteed by an Italian entity controlling the non-Italian issuer, then the guarantee is subject to a 0.25% registration tax.
 The wording of the Decree appears to limit issues to companies that have not previously listed a financial instrument, thereby potentially precluding a second issuance of notes with Subordination Provisions and/or Participation Provisions under the Decree.
 Bonds with Participation Provisions differ from bonds envisaged under Article 2411, paragraph 2 of the Italian Civil Code, which allow the issuance of corporate bonds whose interest rate is linked to the economic results of the issuer (e.g. the interest rate may step up to the extent certain objective profit levels are attained) but do not give rise to a right to receive a percentage of the issuer's actual profits.
 According to the Decree, the Participation Payment must be proportionate to the ratio between the issued corporate bonds with Participation Provisions and the issuer's share capital and reserves, as evidenced in its latest financial statements.
 The wording of the Decree raises some interpretative issues, and it is not clear whether commercial paper issued by Non-listed Companies should fall within the exemptions from withholding taxes envisaged in Decree 239 (as amended by the Decree).
 Large companies are those which exceed the thresholds for small and medium sized companies set out by the European Commission Recommendation no. 2003/261/CE (i.e. exceed the thresholds of 250 employees and annual turnover of Euro 50 million and/or an annual balance sheet total of Euro 43 million).
 See note  above.
 The exception to the rule requiring retention of commercial paper by a sponsor applies to guaranteed commercial paper, but only to the extent the guarantee (which must be provided by specified guarantors) exceeds 25 per cent. of the value of the commercial paper upon issue.
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