Making the most of share and quota leasing

April 28 2010

Corporate aspects
Tax aspects


The Bank of Italy,(1) the tax authorities and corporate law experts agree that financial leasing operations may involve shares in joint stock companies, quotas in limited liability companies and other equity instruments issued by corporate entities.

Share leasing gives a company considerable financing opportunities, particularly when seeking to increase its corporate equity, acquire controlling shares in a target or execute family or management buy-outs.

Corporate aspects

Under a typical share leasing scheme, a corporate entity (typically a bank or financial institution) subscribes to the shares derived from an increase in corporate equity and subsequently leases them to another company. The lessee pays periodical fees to the lessor and retains the option of purchasing the shares on the expiry of the leasing arrangement.

The lessee may be the company that issued the shares or it may be a different entity. However, if a leasing arrangement involves quotas in a limited liability company, the issuer and the lessee cannot be the same entity, as Section 2474 of the Civil Code prohibits a limited liability company from entering into transactions involving its own quotas.

Share leasing generally falls within the scope of provisions regarding a company's right to purchase its own shares. Section 2357 of the code(2) provides that joint stock companies may purchase their own fully paid-up shares only within the limits of their distributable profits and available reserves (as evidenced by their own regularly approved financial statements). In addition, the shareholders' meeting must approve the purchase and set the legal conditions on which the company may execute the transaction, including the price.

In the case of a company with shares traded on a regulated market, the value of the shares held by the company may not exceed 20% of the corporate equity.(3) Thus, joint stock companies whose shares are not traded on a regulated market can use leasing arrangements to increase their corporate equity beyond this threshold.

A leasing agreement should address the question of whether the lessor or the lessee is entitled to exercise the rights pertaining to the leased shares or quotas. Italian law states that the exercise of rights related to shares or quotas resides with the holder, unless a specific provision states otherwise. The Notarial Council has suggested the application by analogy of the provisions governing carry-over transactions and agreements for deferred sale of securities,(4) whereby rights in relation to dividend distribution and the exercise of options are transferred to the lessee, whereas voting rights in the shareholders' or quotaholders' meeting reside with the lessor.

A lessor and a lessee may sign specific agreements governing the exercise of voting rights - for instance, the lessor may agree to exercise its voting rights in the shareholders' or quotaholders' meeting on the lessee's instructions. However, such agreements have no effect in respect of the company. The lessor can also grant the lessee the proxy authority to participate directly in meetings. Another option is for the parties to agree to assign the shares or quotas in question to a trust company, which will manage them in the best interests of both entities.

Tax aspects

The tax authorities have previously considered the tax treatment of share lease agreements.(5) The lessee may not deduct leasing payments from its corporate tax base because shares and quotas are not subject to an amortization process. It may deduct only the interest expenses related to the agreement.(6) However, such expenses are subject to regional tax.

If the lessee applies international accountancy standards (IAS) and international financial reporting standards (IFRS), the holding period for the application of the participation exemption regime(7) on the gains deriving from the disposal of the shares or quotas accrues from the signing of the leasing agreement, and the lessee accounts for the shares or quotas in its financial statements as immovable financial assets from that point. However, if the lessee does not apply IAS/IFRS principles, the holding period runs from the point at which the lessee exercises the purchase option on shares or quotas on the expiry of the leasing arrangement.

For further information on this topic please contact Antonello Lupo or Giuseppe Battaglia at Portolano Colella Cavallo Studio Legale by telephone (+39 066 976 541), fax (+39 066 976 544) or email (alupo@portolano.it or gbattaglia@portolano.it).

Endnotes

(1) Regulation of August 4 2000.

(2) As amended by Legislative Decree 142/2008.

(3) For the purposes of the code, this includes shares held by a controlled company.

(4) Sections 1550 and 1531.

(5) Ruling 69/2004 and Circular 10/2005.

(6) Section 96 of the Income Tax Code (on the deductibility of interest expenses for corporate tax purposes) will apply.

(7) Under the participation exemption regime, gains deriving from the disposal of shares or quotas are subject to corporate tax at only 1.375% if certain conditions are met.

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