Recent challenges of LBOs in Italy and institutional insights: The devil lies in the details

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