FinTech

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved, provided that CONSOB has recently conducted a set of studies on the matter, trying to outline a more precise framework for this phenomenon. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P)-type structures often operated through an electronic platform provider as well as crowdfunding and also direct to retail financing mechanisms.

Issues for startup marketplace lenders

Italian marketplace lending is at an early stage of development but the number of participants and transactions is increasing at a rapid rate. Issues for such lenders may relate to funding structures and the regulatory aspects of marketplace lending. For more information, see FinTech products and uses – particular rules.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record, for example, relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

Recent regulatory changes introduced the possibility for the execution of smart contracts to have the same evidentiary value of written contracts under specific conditions and technical standards that needs still to be approved. Once approved, such a change might represent a significant improvement since smart contracts might be more easily used in the financial services sector.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether, based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Furthermore, because of these different features, it is not only the Italian banks and financial institutions that are interested in this new technology, but also the insurance, digital payments, Industry 4.0, the Internet of Things (IoT), health, retail and public sectors.

As a general remark, it is not quite clear which Italian regulatory reference framework can be (and is) used for managing impacts connected to the crypto-currencies sector; moreover, important proposals for action, such as the adoption of decrees implementing EU provisions, are on the table of the Italian Parliament and are expected to be adopted and implemented in the next future.

Having this said, at the current state of affairs, a first step towards the regulation of the aforesaid sector has been made with reference to the anti-money laundering regulations. With the implementation of the Fourth and Fifth AML Directive providers engaged in exchange services between virtual currencies and fiat currencies and custodian wallet providers have been expressly included within the scope of the obliged entities subject to the requirements and obligations of the AML and CTF regulations.

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. The expression ‘Initial Coin Offering’ was initially used in the relevant market with reference to the issue of crypto-currencies (e.g., Bitcoin, Ethereum); as of today, such expression is used to identify any offering of tokens which do not necessarily represent a crypto-currency but, however, embed various rights and can be purchased against payment either in fiat currency or crypto-currency. ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. In general terms, most ICOs are issued for an activity/project. Tokens may be issued by companies, natural persons or networks of product developers. The company’s business activity is often merely in the phase of being planned (more or less organised start-ups), and the production of goods/services is scheduled to start after the end of funding.

It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

ICOs are substantially similar to an Initial Public Offering as long as both the offerings aim at raising capital from the public made up of a potentially undetermined number of investors, involving a set of activities aimed at promoting/advertising the offering itself. Compared to conventional offerings of financial instruments, ICOs are characterised by the following elements:

• use of blockchain technology, which allows to disintermediate the typical capital markets infrastructure (e.g., custodian banks, underwriters, secondary markets);
• the means of payment used for the transaction settlement, as payments for purchasing tokens are made in crypto-currencies (e.g., Ethereum, Bitcoin) instead of fiat currency;
• they are advertised and promoted via the World Wide Web, which allows promotion and funding at a cross-border level, with no territorial constraints either for the issuer or the promoter;
• the publication of a so-called ‘white paper’ in place of a prospectus, describing the main characteristics of the investment scheme and the object of the offering.

Due to their characteristics, some types of token may qualify as financial instruments or, as financial products (investment tokens or security-like tokens). Other tokens present a variable mix of characteristics and are therefore called ‘hybrid tokens’; these are the most difficult to discuss and qualify in the light of the current regulatory framework. In particular, this last set of tokens may have a remarkable financial content, in addition to being placed to retail investors via public offerings.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

Artificial intelligence and robo advisory systems

The system known as 'robo advisors', or automated financial advice tools, are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. In general, robo advisors or automated financial advice (and optimization) tools are digital/mobile asset management and financial advice platforms, which process data around specified parameters for a variety of financial assets and activities and/or (personal) finances.

Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

In terms of different market sectors, AI brings significant value to financial operations, where both the risk mitigation as well as customer service could be supported. Italian AI is a rapidly growing sector. With reference to the Italian market, it is estimated that in 2019 the assets managed by 'robo advisors' exceeded $400 million (with an average assets approximately equal to $12,000 per client), while the average growth rate forecast between the 2019 and 2023 stands at a total of around 51%.

Data analysis and cloud computing

What is cloud computing?

Cloud computing is a method for delivering scalable and flexible information technology (IT) services in which users can retrieve resources from the internet/intranet through private or public web-based tools and applications, rather than hosting software locally within their own organization. Within the broad 'cloud' concept three main service models can be identified:

• Software as a service (SaaS) involves providing access to and use of, an end user software application, such as e-mail or a word processor, through a pay-as-you-go or on-demand model.
• Platform as a service (PaaS) involves providing access to and use of tools for the development and deployment of custom applications, for example, certain mobile applications.
• Infrastructure as a service (IaaS) involves providing access to and use of computing resources including servers, networking, storage, and data center space on a pay-per-use basis.

Depending on the degree of privacy of the resources and service delivery mechanisms, businesses can employ cloud computing in different ways. Some users maintain all apps and data on the cloud, while others use a hybrid model, keeping certain apps and data on private servers and others on the cloud.

What are the advantages of cloud computing for FinTech firms?

The rise of cloud-based solutions offers FinTech companies a number of potential benefits allowing them to speed-up business processes while reducing costs. As an example, cloud computing could:

• assist in automating audit and verification processes thereby allowing FinTech engineers to work on product enhancement;
• allow maintenance of performance levels even during peak hours or end of month queues, by giving access to high-performance servers and data storage;
• help make the production cycle continuous by providing access to data 24/7, thereby reducing time-to-market of a product/solution; and
• help create an enhanced setup for disaster recovery.

In exploring the potential benefits of cloud computing, attention should be paid to ensure full compliance of each solution with the applicable law, even at local level.

General financial regulatory regime

In relation to the performance of banking, financial or payment services, the main Italian supervisory authorities are:

• the Bank of Italy, which is the central bank of Italy and is entrusted with the overall regulatory supervision of banks and other financial intermediaries, including payment services providers and e-money issuers; and
• the CONSOB, which is the Italian government authority responsible for regulating the Italian securities market as well as the provision and marketing of investment services.

CONSOB is entrusted with supervision on transparency and correctness of regulated entities, including banks and financial intermediaries providing investment services and monitoring compliance with the rules of conduct generally imposed on such intermediaries.

Additional authorities also operate, in relation to specific sectors (eg insurance) or in connection with specific issues (eg competition and data protection).

General

The provision of banking, financial and payment services in Italy is reserved to authorized intermediaries. A person must not carry on a regulated activity in Italy unless authorized or exempt.

Consequently, where FinTech products and applications involve financial activities falling within the scope of the required regulatory authorizations, the firms providing such products and applications, if not otherwise exempt, must be authorized/passported, as the case may be.

Following a public debate involving market operators and based on a document for discussion CONSOB recently published a report on the initial offers and exchanges of crypto-activities. Pending the establishment of a shared European regulatory framework on crypto-assets and, in particular, on their possible qualification as securities, CONSOB’s intention was to start a debate at national level on initial coin offerings (ICOs) and crypto-assets exchanges, in connection with the recent spread of ICOs and therefore, of crypto-assets invested in by Italian investors.

Electronic payments platforms and regulation of peer-to-peer lenders

Electronic money (e-money)

Reference shall be made to the provisions of the e-money directive No. 2009/110/EC (EMD) and to its national implementing measures, which include the Consolidated Banking Act and Legislative Decree No. 45, 16 April 2012, containing the EMD's implementing decree, both as amended from time to time. Moreover, for a complete understanding of the applicable legal and regulatory framework, also the rules regulating the provision of payment services shall be considered, as well as the Bank of Italy secondary level provisions.

E-money is defined as the electronically (including magnetically) stored monetary value, represented by a claim on the issuer, which is issued on receipt of funds for the purpose of making payment transactions. E-money must be accepted by a person other than the e-money issuer and include pre-paid cards and electronic pre-paid accounts for use online.

All providers performing payment services or e-money related activities must be authorized by, or passported with, the Bank of Italy, although, based on the specific functioning mechanism, the management of electronic payment platforms could qualify as a reserved activity, subject to regulations governing payment service providers and e-money issuers, or fall within one of the possible exemptions (eg if the firm qualifies as a mere technical service provider supporting the provision of the relevant services without any involvement in their offering or performance).

Peer-to-peer lending

Peer-to-peer lending activities (also 'social lending' or 'lending based crowdfunding') are defined, under the Italian regulatory framework, as 'the mechanism through which a plurality of borrowers could demand to a plurality of potential lenders, by means of online platforms, refundable funds for personal use or to fund a project'.

Based on the similarity of such activities with those relating to the public savings collection and considering that the latter, in accordance with the Consolidated Banking Act, are exclusively reserved to duly authorized credit institutions, since November 2016, the Bank of Italy has regulated social lending by a regulation governing the performance of collection activities carried out by subjects other than banks. The relevant provisions mainly clarify the conditions to be complied with in order to avoid a qualification of social lending services as reserved savings collection activities.

Bank of Italy's regulation refers both to the managers of social lending platforms and to the subjects who collect or lend funds through such platforms and is generally aimed at preventing non-banking entities from raising significant amounts of funds vis-à-vis an indefinite number of borrowers. In this sense, managers and collectors are, in any case, precluded from collecting demand deposits and from carrying out other forms of collection whatsoever involving the issuance or management of payment instruments having generalized usability. No limits are imposed on banks in carrying out social lending activities through online portals.

The Bank of Italy does not have investigation or sanctioning powers on non-banks entities providing collection activities. Any infringement of the aforesaid provisions is governed by criminal law.

A special regime for the collection of risk capital via online portals (equity crowdfunding) is regulated by the Italian securities law (in particular by the Crowdfunding Regulation ( as amended by CONSOB resolution No. 21110 dated 10 October 2019), adopted by CONSOB pursuant to articles 50- quinquies and 100- ter of the Consolidated Financial Act). In equity crowdfunding, the securities respectively sold are issued by Italian innovative startups and small-to-medium-size companies or by certain undertakings for collective investments investing in those kind of companies. The managers of such portals shall comply with a set of requirements, and in order to be entitled to operate are then enrolled in a specific register kept by CONSOB.

Following recent amendments to the Consolidated Financial Act and the Crowdfunding Regulation, the Italian regulation also introduced the possibility, within certain limits, for the aforesaid entities to collect of bonds and other debt financial instruments through such online portals (debt crowdfunding).

The other possible forms of crowdfunding are not formally regulated and may be included – depending on the specific features and structures adopted – in other forms of financial activity, such as those relating to the granting of loans (whose performance is reserved to duly authorized financial intermediaries).

Regulation of payment services

Reference shall be made to the provisions of the PSD)2 and to its national implementing measures, which include the Consolidated Banking Act, and Legislative Decree No. 11, 27 January 2010, containing the PSD2's implementing decree (PS Decree), both as amended from time to time, as well as Bank of Italy secondary level provisions.

All providers performing payments services related activities shall be authorized by (or passported with) by the Bank of Italy.

In providing and marketing their services, payment services providers must also comply with the transparency and disclosure requirements set forth in the Transparency Provisions.

Application of data protection and consumer laws

The Italian Data Protection Code (Legislative Decree No. 193/2003) applies to the processing of personal data, including data held abroad, if the processing is performed by:

• an Italian or European Union company with a branch/stable organization in Italy;
• an entity established in the territory of a country outside the European Union, where said entity makes use in connection with the processing of equipment, whether electronic or otherwise, situated in the Italian territory, unless such equipment is used only for purposes of transit through the territory of the European Union; and
• a non-European Union controller processing data through a branch/stable organization in Italy.

Data processing under the Italian legislation may imply certain notification and compliance obligations and can give rise to privacy issues such as:

• whether the data is used appropriately;
• whether the collection of data is carried out in an appropriate manner;
• whether the data is disclosed only where disclosure is appropriate;
• whether the data is stored and transmitted safely;
• how long the data will be retained for;
• the circumstances under which the data subject can access and correct the data; and
• whether the data subject is sufficiently and appropriately informed about these matters.

The European General Data Protection Regulation (GDPR) will officially replace some of the provisions of the Italian Data Protection Code from 25 May 2018, but its principles are already being enacted in the Measures issued by the Italian Data Protection Authority. The GDPR is more prescriptive and restrictive and includes mandatory notifications where a breach occurs and provide for severe monetary sanctions in case of breach.

The Italian Consumer Code (Legislative Decree No. 206/2005) applies to any service offered to natural persons acting for purposes outside their trade, craft, business or profession. It includes rules relating to matters such as unfair commercial practices and unfair terms. In order to ensure compliance with the Italian Consumer Code, Fintech companies may consider the implementation of solutions aimed at monitoring and analyzing customer services, mitigating fraud and abuse, and implementing fair lending systems.

Money laundering regulations

The Italian rules governing the prevention of the use of the financial system for money laundering (AML) and/or terrorist financing (CTF) purposes are mainly contained in Legislative Decrees No. 231 of 21 November 2007 (AML Decree), and No. 109 of 22 June 2007, which implement the Fourth AML Directive) and Fifth AML Directives. Additional secondary level provisions which complete the new regulatory framework introduced by the Fourth and Fifth AML Directives have been issued by the Bank of Italy.

In general terms, the Central Information Unit (Unità di Informazione Finanziaria), established within the Bank of Italy, is empowered with supervision and monitoring powers on AML and CTF issues. The overall prevention system:

• is based on the collaboration and coordination between each of the operators and the administrative and investigation authorities;
• is regulated according to the risks involved; and
• requires the operators to comply with a series informative and record-keeping obligations.

FinTech services and activities, where relevant in light of the above, are subject to AML and CTF provisions, especially when involving activities considered as high money-laundering risks. Furthermore, with the implementation of the Fourth and Fifth AML Directives, the Italian legislator has expressly included “crypto currency operators” and “custodian wallet providers” within the category of the “other non-financial operators” subject to the provisions of the AML Decree. Crypto currency operators are defined as “any natural or legal person which provides third parties, in a professional capacity, with services that are functional to the use, the exchange, the custody and storage of virtual currencies and their conversion from, or into, currency of legal tender”, or in digital representations of value, including those convertible in other virtual currencies as well as issuing, offering, transfer and clearing any other service instrumental to the acquisition, negotiation or intermediation in the exchange of the virtual currencies”. Custodian wallet providers are, in turn, defined as “any natural person or entity that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies”.

It should be noted that, according to the aforesaid AML regulations, crypto-currencies operators and custodian wallet providers are, as of today, subject to the AML obligations to the extent that their operations include the performance of the activity of cryptographic storage or of conversion of virtual currencies from, or into, currency of legal tender.

In addition to the above, FinTech providers qualifying as banking or financial institutions or payment services providers shall also comply with the customer due diligence and on organisational requirements set forth in the secondary level regulations of the Bank of Italy.

Early stage

Seed investment

Initial investment in FinTech businesses may be provided by family and friends of the founders and other high-net-worth individuals (often known as business angels) in return for an equity stake. Such seed investment is often used to fund the establishment and early growth of the business before larger investment is available. The investing individuals may also provide know-how and expertise to assist in the company's development.

Crowdfunding

The crowdfunding sector is well established, and may be appropriate for a FinTech business in the early stages. It involves members of the public investing in a business by pooling their resources through an intermediary platform.

Below are the most common models of crowdfunding:

• Equity crowdfunding involves company shares being given in exchange for investment in the business.
• Reward-based crowdfunding provides investors with a tangible benefit, such as early access to a platform or application that the business is developing.
• Donation crowdfunding involves NGO and non-profit associations in relation to the funding of humanitarian projects and nonprofit projects.
• Hybrid crowdfunding is a combination of the above.

Crowdfunding offers a large number of private investors an opportunity to make small-scale investments in early-stage businesses to which they may otherwise not have had access.

Accelerators

There are a growing number of incubators or accelerators in the Italian market which offer support, facilities and funding for startups, often in return for an equity stake, such as iSTARTER.

Venture capital and debt

Venture capital funding is a type of equity investment usually targeted at early stage FinTech companies with an established business and some trading history. Venture capital provides a viable alternative to traditional lending given that the business is unlikely to have the tangible asset base or long track record needed to attract traditional debt funding from financial institutions. Research suggest that there are more than 15 asset managers active in venture capital in Italy with more than 60 funds under management.

Warehouse and platform funding

Warehouse financing and platform financing may be suitable for FinTech companies depending on the type of business and assets.

Senior bank debt and capital markets funding

Senior bank debt

Once a FinTech company is established and has a track record, bank debt becomes a more viable source of funding, either on a secured or unsecured basis depending on the creditworthiness and asset base of the business. In contrast to capital markets funding which is often covenant-lite, bank funding will generally involve the imposition of financial covenants and controls that will apply over the life of the facility. Bank finance may be particularly important for working capital, overdraft, accounts management and general liquidity purposes.

Capital markets funding

In Italy both debt and equity capital markets are accessible to FinTech businesses (usually of a certain size).

Raising finance by way of an Initial Public Offering (IPO) is a possible funding arrangement for FinTech companies that have grown to a certain size. An IPO is the initial sale of company shares on a public exchange, such as the Milan Stock Exchange. The Milan Stock Exchange's Alternative Investment Market (AIM) in particular caters for small, growth-orientated companies.

Issuance of bonds is an alternative funding structure for FinTech businesses.

Convertible bonds/loan notes

Convertible bonds or loan notes may also represent a funding tool for FinTech businesses, being essentially a hybrid between debt and equity. Convertible instruments begin as a bond accruing interest and are convertible into shares in the issuing company at prescribed prices in certain circumstances.

SECURITISATION TRANSACTIONS

An additional funding tool for the FinTech companies may be the realization of a securitisation transaction. In particular, it is possible to securitize the loans granted by FinTech platforms and have access to the funds of the investors on the debt capital markets.

Incentives and reliefs

Innovative startups

Italian tax law establishes a set of tax incentives to Italian companies qualifying as so-called 'innovative' startups. The favourable regime is available to Italian and European Union/European Employment Strategy companies having a branch in Italy, provided they meet a set of requirements. Among others these are as follows:

• The company’s core business should consist of the development, production and commercialization of innovative goods or services of high technological value.
• The company should have been set up for no longer than 60 months.
• The company’s turnover should not exceed €5 million.
• The company shall not distribute profits.

Companies and individuals investing directly or indirectly in qualified innovative startups may benefit from significant tax reliefs up to 30% of the invested amount, subject to a minimum holding period of three years.

Allowance for Corporate Equity

Italian companies and Italian permanent establishments (PEs) of foreign enterprises may benefit from Italian notional interest deduction (NID) (so-called Allowance for Corporate Equity or ACE). The ACE benefit entails a notional deduction from the corporate income taxable base corresponding to the net increase in the 'new equity' injected in the entity after 2010, multiplied by a rate annually determined (1.3% for financial year 2019 and thereafter as set by the Budget Law for 2020). The qualifying equity increases may include equity contributions, retained earnings (with the exception of profits allocated to a non-disposable reserve) and the waiver of shareholder credit.

Research, development AND INNOVATION tax credit ("RDI")

From financial year 2020 , Italian companies and Italian PEs of non-resident companies carrying out qualifying RDI activities (i.e. R&D expenses and technological innovation costs, together RDI) can benefit from a tax credit computed as a percentage of each specific RDI expenditures (e.g. 12% of the costs falling in the base of R&D computation, net of external contributions, up to the amount of Euro 3 Mio per 12 months; 6% of the costs qualified as technological innovation expenses, net of external contributions, up to Euro 1.5 per 12 months; 10% of the costs qualified as technological innovation expenses for new products/processes, net of external contributions, up to Euro 1.5 per 12 months; 6% of the design costs, net of external contributions, up to Euro 1.5 per 12 months).  The tax credit can be used to offset other taxes due, in three equal instalments. Other fulfilments (e.g. formal communication to the Ministry of Economic Development) are mandatory required before the tax credit is used.

Patent box

The patent box regime is a tax bonus introduced in order to improve the development of intellectual property, granting tax benefits to resident and non-resident taxpayers carrying out R&D activities, consisting of partial tax deduction (50%) from corporate income tax for income arising from direct use or licensing of qualified intangible assets (not including commercial trademarks).

Withholding tax exemption on interest payments

Italian tax law provides for an exemption from withholding tax on interest payments on medium-long term loans granted to Italian-resident borrowers by European Union foreign institutional investors (eg banks, insurance companies) and certain approved institutional investors. In order to benefit from the exemption, foreign lenders should comply with Italian law on the exercise of lending activity (to the extent that they operate vis-à-vis the public). The withholding tax exemption would apply to the extent the borrower performs business activities, expressly including holding companies.