Abstract
This study highlights recent institutional challenges faced by Private equity (PE) investors in Italy. These challenges increased the debate on the admissibility of LBOs, especially with reference to the actual nature of the debt underlying LBOs and the deductibility of the related interest payments. Despite the enactment of the 2004 corporate governance reform, which legalized LBOs under specific conditions, and the introduction of the European AIFM Directive (2011/61/EU), the doubts on the admissibility of LBOs have not been fully resolved. Up until recently, the Italian Tax Authority continued to challenge LBOs by interpreting them as tools fraudulently adopted by PE investors to elude the law and evade taxes. As a result, PE investors had to face a number of fiscal challenges and sanctions, which added more uncertainty to the legal admissibility of LBOs in Italy. Recently, new fiscal guidelines and jurisprudence finally changed this perspective, confirming the legitimacy of LBOs.
Highlights
When considering the possibility of implementing a merger and acquisition (M&A) and a leveraged buyout (LBO), for private equity (PE) investors it is essential to carefully understand the details of each country’s legal and fiscal environment
With the corporate governance reform introduced by the Legislative Decree 6/2003, Italy became the first country in Europe to regulate leveraged buyouts, well before the global financial crisis and the subsequent European AIFMD regulation (Alternative Investment Fund Managers Directive, 2011/61/EU)
This study highlights the critical issues raised against LBOs in Italy, from governance and fiscal perspective, as well as the subsequent legal and fiscal interpretations provided within the Italian institutional environment
Summary
When considering the possibility of implementing a merger and acquisition (M&A) and a leveraged buyout (LBO), for private equity (PE) investors it is essential to carefully understand the details of each country’s legal and fiscal environment This need is especially relevant within the European Union, where countries, such as Italy, have implemented a number of legal reforms that can significantly affect the PE industry (Cao, Cumming, Goh, & Wang, 2019; Gibson & Witney, 2018; Amess, 2018; Fox, 2017; Femino, 2014; Cumming & Zambelli, 2010; 2013; 2017). Regulators, and policymakers around the world increased their criticism against leveraged buyouts for their potential detrimental effects on target companies and their stakeholders These types of the transaction have been widely accused of involving a lack of full disclosure and a dangerous increase of the debt-equity ratio of target companies, which in turn could increase their default rate (Zambelli, 2008; 2010; Giannino, 2006).
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