Bank loans have traditionally been “the” primary source of capital for small and medium size businesses. However, due to the constraints of the Eurozone financial crisis and the subsequent credit crunch, Italian ventures are now increasingly turning to the debt capital markets, in a growing effort to pursue funding without relying on a weak banking market. To this end, among many other provisions aimed at supporting the economy, the Italian government, through law decree (decreto legge) 83/ 2012, converted into law by law (legge) 134/ 2012 and law decree 179/ 2012, converted into law by law 221/ 2012, has introduced a more favourable set of rules governing bond issuance by companies (a) qualifying at least as “Small Companies” according to the European Commission’s recommendation 2003/361/EC and (b) not listed on stock markets (“Non-listed Companies”). As a result of the new legal framework, which addresses issues such as the volume of issuances (1. below) and the applicable tax regime for both issuers (2.) and investors (3.), bond issuances can now become an effective means of financing for Non-listed Companies.

1.         Non-applicability of “thin-capitalisation” rules

Law decree 83/ 2012 has amended article 2412 of the Italian Civil Code (codice civile), which generally limited the issuance of corporate bonds (obbligazioni) by Non-listed Companies to an amount not exceeding twice the value of the capital and reserves available for distribution by the issuer. After the reform, Non-listed Companies issuing corporate bonds listed on regulated markets or on multilateral trading facilities within the European Union or the European Economic Community (“RM/ MTFs”; see are now exempt from such limitation, aligning their treatment to that of listed companies in Italy.

In addition, bonds issued may contain subordination clauses and/or profit participation provisions. Such bonds will benefit from the new set of rules on the condition that their initial maturity exceeds 36 months.

2.         Tax Deductibility of costs for and interest paid on bonds

Interest paid on bonds is tax deductible up to a limit of 30% of the EBITDA if they are listed on a RM/ MTF, or – in case they are not listed – are subscribed for by qualified investors (investitori qualificati, as defined by law decree 58/ 1998 [Testo Unico della Finanza] in conjunction with CONSOB Regulation 16190/ 2007) that do not, directly or indirectly, hold more than 2% of the share capital or assets of the issuer and provided that the ultimate beneficial owner of the proceeds is resident in Italy or in “white-listed” states. Costs concerning the issuance of bonds can be fully deducted in the financial year in which they have been incurred.

3.         Abrogation of withholding tax for investors from “white-list” countries

Bonds listed on a RM/ MTF by a Non-listed Company are now being subjected to the same withholding tax treatment enjoyed by listed companies in Italy, i.e. legislative decree (decreto legislativo) 239/ 1996, which provides for an exception to the application of withholding taxes (generally 20%) on interest payments to investors that are (a) beneficial owners resident in “white-list” countries, or (b) institutional investors, not subject to tax, established in “white-list” countries.

Marco Cerritelli, LLM
Markus Woetzel