Prepared by Alessia Angela Zanatto and Sandra Compiano
With the Reply to the Ruling request no. 256, dated December 13th, 2024, the Italian Tax Authorities were asked to evaluate the VAT treatment of the supply of services that, within the scope of Litigation Finance or Third Party Litigation Funding, a SICAF outsources to third parties.
The case at issue
The Applicant is a SICAF that qualifies as a reserved Italian AIF (hereinafter “Applicant” or “SICAF”) and intends to invest in the so-called Litigation Finance by means of the purchase pro soluto of disputed credits arising from compensation claims and legal actions (to be initiated or pending). In the reply to the request, it is clarified that to pursue investment opportunities, a series of activities requiring specific skills, which the Applicant does not own, are necessary. In order to manage the compensation claims, the Applicant decides to involve a foreign company Beta (hereinafter referred to as “Beta” or “outsourcer”). According to the service agreement entered between the parties, the SICAF outsources the following services to Beta:
- development and maintenance of the IT platform[1];
- management of Legal Action and relationships with the damaged companies[2].
The service agreement also states that the outsourced services are “essential and important” pursuant to article 30 of the Commission Delegated Regulation (EU) 2017/565 dated April 25th, 2016, having a significant impact on risk management, regulatory compliance, and the quality of the investment firm’s service. In particular:
- the outsourced services will be carried out by Beta according to the instructions provided by the Applicant;
- Beta is responsible and indemnifies the SICAF from any loss, damage, cost and expense, liability, and claim arising from the execution of the services;
- the SICAF monitors the satisfaction level of the services provided by Beta;
- Beta employs resources with the capacity, skills, and experience necessary to perform the services outsourced to it. To this end, Beta has an operational structure with resources dedicated to executing the outsourced services, with assigned roles and responsibilities, which can only be modified with prior approval from SICAF;
- Beta may use other companies within the Beta Group while maintaining its full and exclusive responsibility to the Client. Further delegation to third-party outsourcersoutside the Beta Group is prohibited unless prior approval is obtained from the Applicant.
The Applicant pays to Beta an annual retainer fee of a predetermined amount, indexed to the damage incurred by the participating businesses, and a success fee indexed to “(i) the amounts collected (in judicial and/or extrajudicial settings by the Company as part of the Legal Action, net of the reimbursements to the Participating Companies, as well as (ii) the internal rate of return achieved by the Applicant on their investment in the Legal Action”.
Finally, the service agreement between the Applicant and Beta provides that, regarding the bookbuilding[3] activity conducted prior to the signing of the service agreement itself, Beta has entered into agreements with intermediaries. These agreements between Beta and the intermediaries provide that Beta must pay these intermediaries brokerage fees when a company interested in the legal action contacted by the intermediary signs the agreement to purchase compensatory credits with the Applicant. The service agreement specifies that SICAF pays the intermediaries the brokerage fees on behalf of Beta.
In relation to the above, the SICAF requests clarifications from the Italian Tax Authorities regarding:
- the VAT treatment of the services provided by Beta to the Applicant remunerated by the retainer fee and the success fee(Question 1);
- the VAT treatment (and, in particular, the application of art. 7-ter, Presidential Decree no. 633/1972) of the brokerage services provided by intermediaries in favour of Beta (Question 2a);
- whether the brokerage commissions are included in the taxable base of the services provided by Beta to the Applicant (Question 2b).
Italian Tax Authorities’ reply of the to the Question 1
With the first question, formulated as a “qualifying ruling request”, pursuant to art. 11, paragraph one, letter b), Law no. 212/2000, the Applicant seeks confirmation regarding the VAT exemption for services provided under outsourcing by Beta, remunerated in the form of retainer fee and success fee.
Before addressing the first question subject to the ruling request, the Italian Tax Authorities refers to and confirms the validity of the Reply to the Ruling request no. 83 dated March 28th, 2024, with which the Italian Tax Authorities recognized the VAT exemption for the financial nature of the services provided by the litigation funder in favour of the owner of the disputed credit – see the previous newsletter of May 20, 2024). We recall that, in this previous guidelines, the Italian Tax Authorities stated that “in light of the current regulatory and practical framework …. (editor’s note: it should be considered that) the services provided by the Company are of a financial nature and, when territorially relevant in Italy, should be considered exempt pursuant to Article 10, first paragraph, n. 1) of the VAT Decree”.
With reference to the services provided by Beta, given the lack of an adequate regulatory and practical framework, the novelty of the activity still essentially in the start-up phase and the innovative method of performing it through an AIF, according to the Italian Tax Authorities:
- the services commissioned to Beta represent essential functions/stages in the conduct of Third Party Litigation Funding which the Applicant, in the exercise (not subject to review) of its entrepreneurial freedom, has chosen to outsource rather than perform internally;
- without these services, the Third Party Litigation Funding cannot be performed by SICAF unless it is equipped with specific internal functions[4];
- objectively represent activities falling under the general categories of ‘Investment Management’ and ‘Marketing‘, as outlined in the aforementioned annex, the following service provisions: i) management of the entire recruitment process of Interested Companies to be presented to SICAF for signing agreements for the purchase of compensation claims (bookbuilding); ii) collection, analysis, and processing of data and evidence for the determination of compensable damage; iii) assistance and support during the legal action both towards SICAF and the participating companies, as well as, iv) negotiation of any settlement agreements. The Italian Tax Authorities then refer the SICAF to apply the VAT exemption to the fees agreed for the foreign company Beta, referring, among others, the Reply to Ruling request no. 489/2002 and the practices mentioned therein (i.e., Replies to Ruling request no. 527/2021 and no. 206/2022).
Italian tax authorities’ reply to the Questions 2a and 2b
With the second question, formulated as an “ordinary or interpretative ruling request,” pursuant to art. 11, paragraph 1, letter a), Law no. 212/2000, the SICAF asks if:
2a) the brokerage services are subject to the place of supply rules according to which they are territorially relevant in the country where the client is established (ex art. 7-ter, paragraph 1, Presidential Decree no. 633/1972);
2b) the amount of brokerage commissions charged to the Applicant are included in the taxable base of the services provided by the third-party outsourcer to the Applicant, pursuant to art. 13, paragraph 1, Presidential Decree no. 633/1972.
The Italian Tax Authorities confirm that the brokerage commissions, although paid by the SICAF (on behalf of Beta), do not constitute the consideration for any service provided by the intermediaries to the SICAF itself. Since there is no reciprocal relationship between the intermediaries and the SICAF, the payment of these sums constitutes a mere financial movement excluded from the scope of VAT under art. 2, paragraph 3, letter a), Presidential Decree no. 633/1972.
That said, the client for the brokerage services is Beta, which, if it paid them directly, would demand a higher fee from SICAF, at least equal to the amount of the commissions in question. Therefore, according to the Italian Tax Authorities, the brokerage commissions contribute to determining the taxable base of the fee that SICAF have to pay to Beta, according to the art. 13, paragraph 1, of Presidential Decree no. 633/1972.
[1] The development and maintenance of the IT platform allow, in particular, the collection of data, evidence, and documents to prove the damage suffered, the data processing aimed at quantifying the damage suffered, and the archiving of contractual documentation stipulated between the damaged adhering Companies and SICAF.
[2] The management of the Legal Action and relations with the damaged companies includes, in particular: the search and selection of interested damaged companies, onboarding of such companies, automatic generation of the Purchase Agreements for compensatory credits concluded between the SICAF and the damaged company; signing of the agreements; provision of access to the platform and management of an helpdesk active at any stage of the collaboration and legal action; assistance in the preparation of the summons and the damage report by the economic expert for the purpose of submitting a compensation claim; general management of the action, legal, external experts, strategy, and negotiation of any settlement agreements under the control and supervision of the SICAF.
[3] In the response under discussion, the activity of bookbuilding is described as the activity that involves “contacting various damaged companies to assess the existence of damages and initiate the Legal Action” and includes “the management of the entire recruitment process of the Interested Companies to be presented to the Applicant for the signing of the Agreements for the purchase of compensation credits”.
[4] This despite the fact that the services in question are not expressly found in the (non-exhaustive) list in Annex II of Directive 2009/65/EC of 13 July 2009 concerning the coordination of legislative, regulatory, and administrative provisions relating to certain undertakings for collective investment in transferable securities, and that Annex II lists the “Functions included in the collective portfolio management activity”, namely: “– Investment management; – Administration (a) legal and accounting services related to fund management; b) customer information service; c) evaluation and pricing (including for tax statement purposes); d) compliance monitoring with applicable regulations; e) maintenance of the register of quota holders; f) distribution of proceeds; g) issuance and redemption of shares; h) settlement of contracts (including the dispatch of certificates); i) keeping of accounting records); – Marketing”.
Let’s Talk
For a deeper discussion, please contact