Real estate funds: focus on the non-taxable income regime

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In its response 327 of June 9, the Internal Revenue Service ruled (again) on the requirements necessary to benefit from the nontaxable status of income from foreign funds participation in Italian real estate funds.

The interpellation analyzes a complex Singaporean structure characterized by an Umbrella fund incorporated under Singapore law, managed by a company also incorporated under Singapore law, and subject to supervision by the local authority. The Umbrella fund is divided into sub-funds, each representing a separate investment body with its independent assets, its own investment policy, and a plurality of investors.

Among the sub-funds is Sub-fund Alfa, whose investment policy is to use the capital raised to purchase real estate in Europe. Specifically, Sub-fund Alfa indirectly participates in an Italian real estate fund through a chain of wholly owned Singaporean and Luxembourg companies. Participation in Sub-fund Alfa is through the subscription of participating shares, which are divided into Class A shares that grant equity and administrative rights-including the right to change investment policies-and Class B shares that, compared to Class A shares, do not give the right to participate in decisions on changing investment policies. In addition, the Umbrella fund has issued management shares that confer only administrative rights. Class A shares represent 97 percent of the Alfa Sub fund’s units and are owned by several investors. Class Bs represent the remaining 3 percent and are owned by a Singaporean company that controls the Umbrella fund manager. The fund manager itself owns 100% of the management shares

The Internal Revenue Service, in line with previous clarifications, clarifies that foreign investment funds that can benefit from the nontaxable regime concerning income distributed by Italian real estate funds are funds established in white list countries. They have the substantive requirements and investment purposes of Italian funds, regardless of the legal form, as long as there is a supervision over the fund or the entity in charge of management.

Among the essential characteristics of Italian funds, the Agency mentions (a) the plurality of investors and (b) the autonomy of the management company’s management choices to the fund’s investees. The Revenue also recalls how the regime is applicable not only in cases of direct participation but also in cases where the fund that meets the requirements listed above invests through a wholly owned white-listed corporate vehicle.

In light of the above, the interpellation request asks whether the requirement of management autonomy from investors is supplemented, given the presence of management shares and Class B shares. In this regard, the Agency responds positively since:

• Management shares held by the manager do not grant profit-sharing rights;
• Class B shares held by the manager’s parent company do not grant power to participate in decisions on changing investment policies.

In light of this, assuming that Sub-fund Alfa has the typical characteristics comparable to an Italian fund, the Revenue confirms that distributions from the real estate fund to Sub Fund Alfa benefit from the exemption regime.