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Maurizio Vasciminni

Pavia e Ansaldo Studio Legale, Rome

maurizio.vasciminni@pavia-ansaldo.it

Giada Russo

Pavia e Ansaldo Studio Legale, Rome

giada.russo@pavia-ansaldo.it

Giovanni Gigliotti

Pavia e Ansaldo Studio Legale, Rome

giovanni.gigliotti@pavia-ansaldo.it

 

Leveraged buy-out transactions under Italian law

A leveraged buy-out (LBO) is the transaction by which a company (pre-existing or established for the specific transaction), having obtained a loan from a bank, acquires a controlling or even totalitarian interest in another company, the so-called ‘target’.

The second step of an LBO consists of the merger by incorporation of the target in the acquiring company. Following the merger, the assets of the two companies are unified, with the result that the assets of the target incorporated company, which has now become the property of the incorporating company, will repay the debt of the incorporating company for the acquisition of the target.

In Italy, LBO transactions are regulated by Article 2501-bis, Italian Civil Code. Article 2501 provides for some conditions which an LBO transaction shall meet in order to be lawful under Italian law. In particular, the transaction shall be justified by detailed reasons, indicated in a specific report. The merger plan, whose reasonableness shall be certified by experts, shall indicate the financial resources required to satisfy the obligations of the company resulting from the merger.

When an LBO is to be considered unlawful under Italian law

In some cases, the processes of restructuring and industrial reorganisation, especially if carried out in the context of large groups of companies, may constitute abusive behaviour pursuant to Italian tax legislation.

According to Italian tax law, the distorted use of legal instruments suitable for obtaining tax relief is prohibited. This is a general principle of law, which applies even in the absence of an express law provision in the subject matter.

Therefore, a leveraged buy-out transaction aimed only at avoiding taxes, even if seemingly legitimate, shall be considered unlawful according to this general anti-elusive principle of the Italian legal system.

The ‘valid commercial reason’ criterion

The Italian Corte di Cassazione (Court of Cassation) clarified when the aforementioned general anti-elusive principle shall be mitigated by specific circumstances.

With Judgment 868/2019, the Corte di Cassazione stated that the prohibition of abusive behaviour is based on the achievement of an unfair fiscal relief through corporate transactions which are not justified by a ‘valid commercial reason’.

The Corte di Cassazione, in accordance with the principles developed in the settled case law of the Court of Justice of the European Union (CJEU),[1] clarified that even if ‘valid commercial reasons’ is a concept involving more than the attainment of a purely fiscal advantage, a leveraged buy-out transaction shall be considered valid when based on different purposes, including fiscal advantages, provided that the fiscal advantage obtained must not be preponderant in the context of the transaction.

Moreover, in order to determine whether the planned operation has an elusive intent, the competent national authorities cannot confine themselves to applying predetermined general criteria, but they must subject each particular case to a general examination.

The Corte di Cassazione, applying for the first time the aforementioned principles to a leveraged buy-out, stated that this type of corporate transaction, implying a significant financial commitment and a consequent reduction in the tax burden, shall not be considered elusive, in case of existing organisational needs justifying the transaction.

In other words, for a leveraged buy-out transaction to be considered unlawful it is necessarily the concurrence of three conditions: (1) the absence of valid commercial reasons; (2) the exclusive purpose of obtaining, through the transaction itself, a tax advantage; and (3) the fraudulent intent expressed in the means used to achieve the aforementioned elusive purpose.

Moreover, in such cases, the national tax authority has the burden of proving the existence of a fraudulent intent and that the elusive purpose is the only reason for which the transaction is carried out.

Conclusions

Given the general prohibition of corporate transactions aimed at merely obtaining a tax relief, a company shall not be prevented from choosing between different restructuring measures and carrying out an LBO, only because the same economic result of such transaction could have been achieved through a measure which would have implied a higher tax burden.

An LBO transaction shall be considered unlawful only if carried out without valid commercial reasons and for the exclusive purpose of fraudulently obtaining a tax advantage.

On the contrary, as the Corte di Cassazione clarified by Judgment 868/2019, the elusive nature of a leveraged buy-out transaction, which implies fiscal advantages, must be excluded when it is possible to identify substantial non-fiscal reasons, which may also consist in organisational, structural and financial improvements for the company.

 

 

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