Capital Markets and Portfolio Investment

The GOI welcomes foreign portfolio investments, which are generally subject to the same reporting and disclosure requirements as domestic transactions.  Financial resources flow relatively freely in Italian financial markets and capital is allocated mostly on market terms. Foreign participation in Italian capital markets is not restricted.  In practice, many of Italy’s largest publicly-traded companies have foreign owners among their primary shareholders. While foreign investors may obtain capital in local markets and have access to a variety of credit instruments, access to equity capital is difficult.  Italy has a relatively underdeveloped capital market and businesses have a long-standing preference for credit financing. The limited venture capital available is usually provided by established commercial banks and a handful of venture capital funds.

Italy’s conservative regulatory system somewhat limits portfolio investment.  Italy’s financial markets are regulated by the Italian securities regulator (CONSOB), Italy’s central bank (the Bank of Italy), and the Institute for the Supervision of Insurance (IVASS).  CONSOB supervises and regulates Italy’s securities markets (e.g., the Milan Stock Exchange). The European Central Bank (ECB) assumed direct supervisory responsibilities for the 12 largest Italian banks in 2019 and indirect supervision for less significant Italian banks through the Bank of Italy.  IVASS supervises and regulates insurance companies. Liquidity in the primary markets (e.g., the Milan exchanges) is sufficient to enter and exit sizeable positions, though Italian capital markets are small by international standards. Liquidity may be limited for certain less-frequently traded investments (e.g., bonds traded on the secondary and OTC markets).  

Italian policies generally facilitate the flow of financial resources to markets.  Dividends and royalties paid to non-Italians may be subject to a withholding tax, unless covered by a tax treaty.  Dividends paid to permanent establishments of non-resident corporations in Italy are not subject to the withholding tax.  

In 2009, the United States and Italy enacted an income tax agreement to prevent double-taxation of each other’s nationals and firms, and to improve information sharing between tax authorities.

In 2014 the United States and Italy signed an intergovernmental agreement to implement provisions of the U.S. law known as FATCA (Foreign Account Tax Compliance Act), that allows for the automatic exchange of information between tax authorities.  This automatic exchange of information takes place on the basis of reciprocity, and includes accounts held in the United States by persons resident in Italy and those held in Italy by U.S. citizens and residents.

Italy imposed a financial transactions tax (FTT, a.k.a. Tobin Tax) beginning in 2013.  Financial trading is taxed at 0.1 percent in regulated markets and 0.2 percent in unregulated markets.  The FTT applies to daily balances rather than to each transaction. The FTT applies to trade in derivatives as well, with fees ranging from EUR 0.025 to EUR 200.  High-frequency trading is also subject to a 0.02 percent tax on trades occurring every 0.5 seconds or faster (e.g., automated trading). The FTT does not apply to “market makers,” pension and small-cap funds, transactions involving donations or inheritances, purchases of derivatives to cover exchange/interest-rate/raw-materials (commodity market) risks, and financial instruments for companies with a capitalization of less than EUR 500 million.  

Italy has sought to curb widespread tax evasion by improving enforcement and changing popular attitudes.  GOI actions include a public communications effort to reduce tolerance of tax evasion; increased and visible financial police controls on businesses (e.g., raids on businesses in vacation spots at peak holiday periods); and audits requiring individuals to document their income.  In 2014 Italy’s Parliament approved the enabling legislation for a package of tax reforms, many of which entered into force in 2015. The tax reforms aim to institutionalize OECD best practices to encourage taxpayer compliance, including by reducing the administrative burden for taxpayers through the increased use of technology such as e-filing, pre-completed tax returns, and automated screenings of tax returns for errors and omissions prior to a formal audit.  The reforms also offer additional certainty for taxpayers through programs such as cooperative compliance and advance tax rulings (i.e., binding opinions on tax treatment of transactions in advance) for prospective investors.

The GOI and the Bank of Italy have accepted and respect IMF obligations, including Article VIII.  

Credit is allocated on market terms, with foreign investors eligible to receive credit in Italy.  In general, credit in Italy remains largely bank-driven. In practice, foreigners may encounter limited access to finance, as Italian banks may be reluctant to lend to prospective borrowers (even Italians) absent a preexisting relationship.  Although a wide array of credit instruments are available, bank credit remains constrained following the financial crisis. Weak demand, combined with risk aversion by banks, continues to constrain lending. The latest business surveys indicate that credit conditions are easing, yet availability of credit remains constrained, especially for smaller firms.    

Money and Banking System

Despite isolated problems at individual Italian banks, the banking system remains sound and capital ratios exceed regulatory thresholds.  However, Italian banks’ profit margins have suffered since 2011 as a result of tightening European supervisory standards and requirements to increase banks’ capital.  The recession brought a pronounced worsening of the quality of banks’ assets, which further dampened banks’ profitability. The ratio of non-performing loans (NPLs) to total outstanding loans decreased significantly since its height in 2017.  Currently net NPLs stand at EUR 33 billion. The GOI is also taking steps to facilitate acquisitions of NPLs by outside investors. In December 2016, the GOI created a EUR 20 billion bank rescue fund to assist struggling Italian banks in need of liquidity or capital support.  Italy’s fourth-largest bank, Monte dei Paschi di Siena (MPS), became the first bank to avail itself of this fund in January. The GOI also facilitated the sale of two struggling “Veneto banks” (Banca Popolare di Vicenza and Veneto Banca) to Intesa San Paolo in mid-2017. In January 2019, Banca Carige, the smallest Italian bank under ECB supervision, was put under special administration.  

Italy’s central bank, the Bank of Italy (BOI), is a member of the euro system and the European Central Bank (ECB).  In addition to ECB supervision of larger Italian banks, BOI maintains strict supervisory standards. The Italian banking system weathered the 2007-2013 financial crisis without resorting to government intervention.

The banking system in Italy has consolidated since the financial crisis, though additional consolidation is needed, according to the OECD and ECB.  In 2017, the Italian banking landscape included 70 banking groups (comprising 129 banks), 393 banks not belonging to a banking group, and 82 branches of foreign banks.  The GOI is taking further steps to encourage consolidation and facilitate acquisitions by outside investors. The Italian banking sector remains overly concentrated on physical bank branches for delivering services, further contributing to sector-wide inefficiency and low profitability.  Electronic banking is available in Italy, but adoption remains below euro-zone averages and non-cash transactions are relatively uncommon.

The London Stock Exchange owns Italy’s only stock exchange: the Milan Stock Exchange (Borsa Italiana).  The exchange is relatively small — 357 listed companies and a market capitalization of only 33.5 percent of GDP as of December 2018.  Although the exchange remains primarily a source of capital for larger Italian firms, Borsa Italiana created “AIM Italia” in 2012 as an alternative exchange with streamlined filing and reporting requirements to encourage SMEs to seek equity financing.  Additionally, the GOI recognizes Italian firms remain overly reliant on bank financing, and has initiated some programs to encourage alternative forms of financing, including venture capital and corporate bonds. While financial experts have held that slow CONSOB processes and cultural biases against private equity have limited equity financing in Italy, panelists at the March 2019 annual meeting of the Italian Association of Private Equity, Venture Capital, and Private Debt (AIFI) said investment by private equity funds in Italy rose by 98 percent from 2017 to 2018, totaling EUR 9,788 million —still a low figure given the size of Italy’s economy.

The Italian Companies and Stock Exchange Commission (CONSOB), is the Italian securities regulatory body: http://www.consob.it  .

Most non-insurance investment products are marketed by banks, and tend to be debt instruments.  Italian retail investors are conservative, valuing the safety of government bonds over most other investment vehicles.  Less than ten percent of Italian households own Italian company stocks directly. Several banks have established private banking divisions to cater to high-net-worth individuals with a broad array of investment choices, including equities and mutual funds.

There are no restrictions on foreigners engaging in portfolio investment in Italy.  Financial services companies incorporated in another EU member state may offer investment services and products in Italy without establishing a local presence.

Any investor (Italian or foreign) acquiring a stake in excess of two percent of a publicly traded Italian corporation must inform CONSOB, but does not need its approval.  Any Italian or foreign investor seeking to acquire or increase its stake in an Italian bank equal to or greater than ten percent must receive prior authorization from the Bank of Italy (BOI).  Acquisitions of holdings that would change the controlling interest of a banking group must be communicated to the BOI at least 30 days in advance of the closing of the transactions. Approval and advance authorization by the Italian Insurance Supervisory Authority IVASS are required for any significant acquisition in ownership, portfolio transfer, or merger of insurers or reinsurers.   Regulators retain the discretion to reject proposed acquisitions on prudential grounds (e.g., insufficient capital in the merged entity).

The Ministry of Economy and Finance has indicated its interest in blockchain technologies, but this discussion remains in the formative stages.  Blockchain technologies are not currently being used in banking transactions, nor have any banks announced their intention to start using them.  However, in late 2018, the Association of Italian Banks (ABI) tested blockchain technology in a project associated with check clearing.

Foreign Exchange and Remittances

Foreign Exchange Policies

In accordance with EU directives, Italy has no foreign exchange controls.  In December 2018 Parliament passed a decree which imposed a 1.5 percent tax on remittances sent outside of the EU via money transfer.  The government estimates that the tax on remittances to countries outside of the EU will raise several hundred million euros per year. There are no restrictions on currency transfers; there are only reporting requirements.  Banks are required to report any transaction over EUR 1,000 due to money laundering and terrorism financing concerns. Profits, payments, and currency transfers may be freely repatriated. Residents and non-residents may hold foreign exchange accounts.  In 2016, the GOI raised the limit on cash payments for goods or services to EUR 3,000. Payments above this amount must be made electronically. Enforcement remains uneven. The rule exempts e-money services, banks, and other financial institutions, but not payment services companies.

Italy is a member of the European Monetary Union (EMU), with the euro as its official currency.  Exchange rates are floating.

Remittance Policies

There are no limitations on remittances, though transactions above EUR 1,000 must be reported.

According to the Financial Action Task Force, Italy has a strong legal and institutional framework to fight money laundering and terrorist financing and authorities have a good understanding of the risks the country faces.  There are areas where improvements are needed, such as its money-laundering investigative and prosecutorial action on risks associated with self-laundering, stand-alone money laundering, and foreign predicate offenses, and the abuse of legal persons.

Sovereign Wealth Funds

The state-owned national development bank Cassa Depositi e Prestiti (CDP) launched a strategic wealth fund in 2011, now called CDP Equity (formerly Fondo Strategico Italiano – FSI).  CDP Equity has EUR 3.5 billion in capital, and has invested EUR 3.7 billion in eleven portfolio companies.  CDP Equity generally adopts a passive role by purchasing minority interests as a non-managerial investor. It does not hold a majority stake in any of its portfolio companies.  CDP Equity invests solely in Italian companies with the goal of furthering the expansion of companies in growth sectors—though some of these investment decisions are political. CDP Equity provides information on its funding, investment policies, criteria, and procedures on its website (http://en.cdpequity.it/  ).  CDP Equity is open to capital investments from outside institutional investors, including foreign investors.  CDP Equity is a member of the International Working Group of Sovereign Wealth Funds and follows the Santiago Principles.  

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

* Italian GDP data are taken from ISTAT, the official statistics agency.  ISTAT publishes preliminary year end GDP data in early February and issues revised data in early March.  Italian FDI data are from the Bank of Italy and are the latest available; new data are released in May.

Table 3: Sources and Destination of FDI

The 2017 IMF statistics above show Italy’s largest investment partners to be within the European Union and the United States.  This is consistent with Italy being fully integrated with its EU partners and the United States. Note: Foreign direct investment data can vary widely by source, reflecting different definitions used.  End note.

Table 4: Sources of Portfolio Investment

The statistics above show Italy’s largest investment partners to be within the European Union and the United States.  This is consistent with Italy being fully integrated with its EU partners and the United States.

Capital Markets and Portfolio Investment

The convergence of monetary policy following the adoption of the euro led to a significant lowering of interest rates; however, the eurozone crisis and the downgrade of Spanish sovereign debt had a negative effect on public financing costs. Foreign investors do not face discrimination when seeking local financing for projects. A large range of credit instruments are available through Spanish and international financial institutions. Many large Spanish companies rely on cross-holding arrangements and ownership stakes by banks rather than pure loans. However, these arrangements do not act to restrict foreign ownership. Several of the largest Spanish companies that engage in this practice are also publicly traded in the U.S. There is a significant amount of portfolio investment in Spain, including by American entities. Spain has an actively traded and liquid stock market.

Money and Banking System

Spain’s domestic housing crisis, which began in 2007, was linked to poor lending practices by Spanish savings banks (cajas de ahorros), many of which were heavily exposed to troubled construction and real estate companies. The government subsequently created a Fund for Orderly Bank Restructuring (FROB) through Royal Decree-law 9/2009 of June 26, which restructured credit institutions with an eye toward bolstering capital and provisioning levels. The number of Spanish financial entities has shrunk significantly since 2009 with 50 entities consolidated into 11 as of March 2019 (Banco Santander, BBVA, Bankinter, Banco Sabadell, CaixaBank, Bankia, Ibercaja Banco, Kutxabank, Liberbank, Abanca, and Unicaja Banco).

Since the financial sector’s peak in 2008, the number of financial institution branches that accept deposits has been reduced by 43.1 percent, according to Bank of Spain and European Central Bank data. Catalonia is the Spanish region most affected by the closure of financial branches, as 55.8 percent of the branches have closed in the past decade. The economic crisis, the wave of mergers and acquisitions, the digitalization of the sector, and the need to reduce costs led to a radical adjustment of the branch network. There were 26,011 financial institution branches at the end of 2018, according to the Bank of Spain, the lowest number since the end of 1980. The sector has also shed nearly 95,000 workers, and downsizing continues as banks reassess profitability. With profit margins narrowing, banks are continuing to downsize, reducing both numbers of employees and branches. Banco Santander plans to close 1,000 branches and lay off more than 3,000 employees over the next two to three years. CaixaBank announced the closure of 800 branches and plans to lay off more than 2,000 employees. BBVA planned the closure of 195 offices, Bankia about 25 offices, and the merger of two medium-sized banks, Unicaja and Liberbank, was estimated to result in layoffs for 3,000 employees and the closure of 200 branches. Early retirement for those over 50 years old has been the mechanism of choice for banks seeking to downsize their workforce. In 2017, two significant banking consolidations occurred. Banco Santander (Spain’s largest bank by market capitalization) acquired Banco Popular in June 2017 after the EU’s Single Resolution Board (SRB)—the centralized banking authority for the EU, established in 2015—deemed Banco Popular as “failing or likely to fail.” Later in June, Bankia agreed to acquire Banco Mare Nostrum—a deal finalized in January 2018, making Bankia Spain’s fourth-largest bank in terms of market capitalization.

In January 2014, Spain cleanly exited its EU aid program, the European Stability Mechanism (ESM), which was used to recapitalize Spanish banks in 2012 and 2013. Spain has made nine voluntary early repayments of its ESM loans; through 2018, Spain had paid back 19.6 billion EUR of the original 41.3 billion EUR loan. These payments have boosted investor confidence in the Spanish economy and have earned praise from EU officials. In November 2015, the Government approved legislation implementing the Law on the Recovery and Resolution of Credit Institutions and Investment Service Companies. The regulation also develops the role of the Orderly Bank Restructuring Fund (Spanish acronym: FROB), as the National Resolution Authority, as well as the contributions of institutions to the National Resolution Fund and the Deposit Guarantee Fund. The flow of credit has been restored and alternative financing mechanisms have been created. The IMF conducted a Financial System Stability Assessment of Spain in August 2017—the first such review since 2012—and deemed that Spain’s financial system has made steady progress strengthening its solvency and reducing nonperforming loans (NPLs) since 2012.

Total assets for the five biggest banks in Spain at the close of 2018 were 2.95 trillion euros:

1. Banco Santander: 1.459 trillion euros
2. Banco Bilbao Vizcaya Argentaria (BBVA): 677 billion euros
3. CaixaBank: 386.6 billion euros
4. Banco Sabadell: 223.2 billion euros
5. Bankia: 205.2 billion euros

Foreign Exchange and Remittances

Foreign Exchange Policies

There are no controls on capital flows. In February 1992, Royal Decree 1816/1991 provided complete freedom of action in financial transactions between residents and non-residents of Spain. Previous requirements for prior clearance of technology transfer and technical assistance agreements were eliminated. The liberal provisions of this law apply to payments, receipts and transfers generated by foreign investments in Spain.

Remittance Policies

Capital controls on the transfer of funds outside the country were abolished in 1991. Remittances of profits, debt service, capital gains, and royalties from intellectual property can all be affected at market rates using commercial banks.

Sovereign Wealth Funds

Spain does not have a sovereign wealth fund or similar entity.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

*Ministry of Industry, Trade, and Tourism, http://www.comercio.gob.es/es-ES/inversiones-exteriores/informes/Paginas/presentacion.aspx  

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment