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Italy’s whitelisting of Channel Islands positive for private equity

Gorey Castle in Jersey
The Italian parliament has whitelisted Jersey and Guernsey for corporate taxation rules
  • Alice Murray
  • Alice Murray
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Italy's recent decision to remove Jersey and Guernsey from its blacklist highlights the country's increasingly pro-business stance, and spells good news for private equity. Alice Murray reports

In early January the Italian parliament whitelisted Jersey and Guernsey, marking the removal of their previously blacklisted status. While the impact of this development may appear small in the immediate term, it highlights an increasing pro-business attitude from Italian authorities, and could lead to a more private-equity-friendly environment.

The Italian parliament approved the Stability Law for 2016 at the start of the year, which revised the country's tax codes on blacklists on corporate taxation rules. For Jersey and Guernsey, this means they are no longer part of Italy's blacklist, and instead have been recognised as compliant jurisdictions.

While Italy and Luxembourg have strong links, which has meant Italian private equity funds and deals are typically structured via Luxembourg to avoid double taxation, Italian institutional investors are not as well-versed in private equity compared to their counterparts in the rest of Europe. According to James Bermingham, general counsel of Aztec, Italian investors often think of funds in terms of mutual funds like UCITS (undertakings for collective investment in transferable securities) rather than partnership-type arrangements.

Close, but no SICAR
For Italian private equity funds, most of which are domiciled in Luxembourg, and which typically use SICARs or private feeder funds to house commitments from Italian institutional investors, this most recent development has much more to do with Europe's more general move away from blacklists. Indeed, this whitelisting appears to encourage a move to a more tax-friendly environment – rather than a move directed specifically at private equity.

At the same time, it also recognises the Channel Islands as compliant jurisdictions, and means Italian institutional investors can now invest in Channel Island partnerships.

For Geoff Cook, CEO of Jersey Finance, the whitelisting marks an important development for Jersey. While it will make it easier to invest in and out of Italy, for him the key change is that the Channel Islands have been recognised by one of Europe's largest markets as a compliant partner.

He agrees that the majority of Italian private equity funds and deals are structured through Luxembourg, but believes that for those funds wanting to market and invest beyond Europe, the Channel Islands can provide a more suitable home.

"This is a precursor to opening up Italian private equity; it recognises a need for structural change, and it's promising for investors." Geoff Cook, Jersey Finance

Furthermore, if the EU does grant the Channel Islands the AIFMD common passport, which is looking likely to happen following the European Securities and Markets Authority's (Esma) endorsement of Jersey and Guernsey in August last year, then being whitelisted by Italy could be of even more significance. "We're not expecting a flood of business off the back of this in the immediate term," says Cook, "But it does free things up."

Domino effect
For Cook, the immediate advantage of being whitelisted by Italy is it may encourage other countries still operating blacklists – namely Spain – to remove these mechanisms as well. Bermingham also views the development in this way: "This shows the European Union is trying to push away from country blacklists, which were a crude tool at best for policing tax avoidance. From a wider perspective, this is really about creating a more sensible environment to do business."

With regard to the impact for private equity, while on the surface the whitelisting may not deliver immediate changes, it is an encouraging development. Says Cook: "This is a precursor to opening up Italian private equity; it recognises a need for structural change, and it's promising for investors. It's not an enormous step but it is an acknowledgement of our reputation as a secure and sustainable place in which to establish tax-neutral vehicles for cross-border co-investment out of and into the EU."

Beneath what may appear to be a small step, what is clear from the removal of Jersey and Guernsey from Italy's blacklist is the country's increasingly pro-business attitude. One clear way of boosting Italian private equity is to encourage more domestic institutional investors to invest into local private equity funds. If Italian pension funds and insurance funds are committing to local GPs it will naturally increase investment from other institutional investors not only in Europe but also globally. Enabling greater flexibility over how investors can access Italian private equity can only be a good thing in this respect.

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