57thUIA CONGRESS
Macau / China
October 31 – November 4, 2013
FOREIGN INVESTMENT COMMISSION
Saturday, November 2, 2013
CHINESE INVESTMENTS ABROAD AND
FOREIGN INVESTMENTS IN CHINA
THE ITALIAN PERSPECTIVE.
SUPPORTING FOREIGN INVESTMENTS AND NEW MODELS FOR
SUPPORTING THE “INTERNATIONALISATION” OF SMALL AND MEDIUM-SIZED
ITALIAN ENTERPRISES
Carlo Mastellone
Studio Legale Mastellone, “LegAll® Firenze”
Via Gustavo Modena, 23
50121 Firenze (Italy)
Tel. +39 055.4620040
Fax +39 055.475854
in collaboration with
Pietro Mastellone (tax law specialist)
© UIA 2013
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Summary of contents:
Section I. – Investing in Italy.
1. Foreign direct investments in Italy – An economic overview.–1.1. Reasons for the relatively low attractiveness of Italy for FDI. –1.2. Good reasons for investing in Italy. –2. Choice of corporate structure for a foreign subsidiary in Italy. – 2.1. S.p.A. vs. S.r.l.–2.2. Società per Azioni (S.p.A.). – 2.3. Società a responsabilità limitata (S.r.l.). –2.4. Conditions and steps to be taken to establish a subsidiary company in Italy. –2.5. Registrations. –3.Italian legislation on corporate groups. –3.1. The concept of “management” and “co-ordination of companies”. –3.2.How is a group structure reflected in the corporate documents (i.e. in the corporate purpose of the subsidiary, in other articles of association, in the organisational regulations/articles of association)? Impact on the corporate liability. –3.3. Conflicts of interests between the parent/subsidiary and foreign shareholder/local management. –3.4. Protections given to minority shareholders that should be considered if the parent company is the controlling but not the sole shareholder. –3.4.1. Minority shareholder rights in a Public limited company (Società per Azioni).–3.4.2. Minority shareholder rights in a Private limited company (S.r.l.). –4. Civil liability. –4.1. Civil liability of i. individuals such directors/managers, and ii. legal entities such the parent company (e.g. corporate responsibility including directors and/or parent company accounting principles; concept of “trust” and “reliance on parent company”).–4.2. “Piercing the corporate veil”. –4.3. No liability threshold. –4.4. The Group is not an actionable entity. –4.5.The use of “Comfort letters”. –5. Criminal / administrative liability. – 5.1.Statutory criminal offences of legal entities of which a parent company has to be aware when doing business in Italy. –5.2. Italian implementation of the OECD Convention of February 15, 1999 on Combating Bribery of Foreign Public Officials International Business Transactions. –5.3. Directors, management, auditors and/or other advisors (e.g. lawyers) can be held liable for criminal offences. –6. Branch Office (Sede Secondaria) of foreign company. –6.1. Description and Pros & Cons. –6.2. Steps to be taken to register a branch office. –7. Representative Office (Ufficio Di Rappresentanza) of foreign company. –7.1. Description and Pros & Cons. – 7.2. Steps to be taken to register a representative office. –8. International tax issues and tax incentives for investments. –8.1. Transfer pricing. –8.2. Controlled foreign companies (CFC). –8.3. Tax incentives for investments in Italy.
Section II. - Investing in and from China.
9. The relationship between Italy and China. –9.1. Similarities between the two countries. –9.2. Italy-China commercial relationship. –9.3. The legal framework. –9.3.1. ICSID Convention. –9.3.2 Bilateral treaties: 1985 Agreement concerning the encouragement and reciprocal protection of investments.–9.3.3. Italy-China mediation. - 9.3.4. Other Italy-China bilateral agreements.
Section III. - Supporting the “internationalisation” of small and medium-sized Italian enterprises
10.Networks between enterprises for export trade: the Italian experience. - 10.1. Nature of the Network. - 10.2. Requirements and constitution. - 10.3. Effects. - 10.4. New members joining the network; termination . - 10.5. Case-Study . - 10.5.1. RIBES: a network among ESAOTE and smaller enterprises in the biomedical industry – toward innovation and competition. - 10.5.2. GUCCI’s perspective of the network – autonomy and independence of the chain of supply . - 10.5.3. “Rating Project” . - 10.5.4. Two other cases in the automotive industry. - 10.6. Conclusions
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Section I
Investing in Italy
1. Foreign direct investments in Italy – An economic overview
1.1. Reasons for the relatively low attractiveness of Italy for FDI
Historically, the attractiveness of the Italian economy for foreign direct investment (FDI) hasbeen limited, compared to that of most other European countries and to its own potential.Italy’s inward FDI (IFDI) performance was particularly poor in 1990-2000, when cumulativeIFDI flows in the country were only 13% of those in the United Kingdom, 17% of those inGermany, 21% of those in France, and 35% of those in Spain.[1] Since 2000, Italy’s IFDI stockhas almost tripled –a growth rate similar to that of FDI stock in the European Union (EU) as awhole – reaching US$ 364 billion in 2009, before falling to US$ 337 billion in 2010.
Notwithstanding the relatively low level of IFDI stock, foreign majority-ownedaffiliates playan important role in the Italian economy. [2]As in other European countries (e.g. Germany), the growth of IFDI in the last decade wasdriven by privatisation and liberalisation in telecommunications and particularly in theelectricity, gas and water supply industries. Between 2000 and 2009, the share of energyproducts – a category that includes petroleum extraction and related industries as well aselectricity, gas and water supply services – in total IFDI stock rose from 2% to 13% mainly due to an increase in the IFDI stock in those services, where IFDI had beennegligible in 2000. The relatively low attractiveness of Italy for FDI can be attributed to a number of factors:
1)thelack of adequate infrastructure
2)the burdensome red tape and inefficient bureaucracy
3)thelimited competition in many service industries
4)the high costs of energy
5)the high level ofcorruption and organized crime[3]
6)the extent of the black economy
7)the number of overlappingregulatory public authorities each acting independently from one another
8)the uncertainty(volatility) of the legal framework, and
9)the inadequate assurance of the efficient enforcementof property rights.[4]
Additional obstacles to IFDI stem from some of the characteristics of theItalian industrial system, such as:
1)the limited number of publicly traded companies and
2)therelative lack of information that limit substantially the scope for cross-border merger andacquisition (M&A) activity.
The weaknesses of the national innovation system, the paucity and the uncertainty of publicresearch grants (that could constitute an important incentive for MNEs to locate their researchand innovation centers), and the modest international competitiveness of a large part of high-techindustries have led to a contraction of the activity of foreign affiliates in those industries.The financial market is underdeveloped, compared to other industrialized economies, withvery few truly public companies listed on the Italian stock market.
According to a study carried out by IlSole24Ore, the following are the weaknesses of Italy:
1)High national debt, tax evasion
2)Loss of export market share
3)Low productivity
4)Inadequacy of research and higher education
5)Government inefficiency, large number of civil servants
6)Banking sector weakened by exposure to Italy’s sovereign debt
7)Backwardness of the South
1.2. Good reasons for investing in Italy
Despite these factors, there are still many good reasons to invest in Italy[5]:
1)The first is Italy’sGDP, ranking fourth in Europe and tenth worldwide (more than US$ 1.9 trillion in 2010).
2)Thesecond is the importance of the domestic market, which is the main reason for IFDI to Italy,related to its size (almost 60 million consumers) and potential growth rates. The country isacknowledged to be a “trend setter” for major consumer products (e.g., food, fashion anddesign, mobile phones).
3)Moreover, Italy is centrally located in the heart of the Mediterraneanand is (or should be) a crucial crossroads for trade through land, sea and air routes linking theNorth and the South of Europe.
4)In addition, the country has a diversified industrial economy. Italian manufacturing industryranks second in terms of value-added and exports in Europe, behind Germany.
5)“Made inItaly” represents excellence and creativity all over the world.
6)Italy also offers a skilledworkforce at relatively low cost compared to other advanced economies
7)The Italianeconomy is characterized by a unique system of high-quality small and medium-sizedenterprises (SMEs), often located in clusters of excellence that provide major externaleconomies for specialist producers and thus offer significant opportunities for MNEs. ItalianSMEs can be either very demanding customers that cooperate with their suppliers ofmachinery and intermediate goods for the development of advanced products (e.g., chemistryfor the textile and leather industries, tiles, furniture, textiles and clothing, electronics andindustrial machine tools) or efficient suppliers of specialized machinery and originaltechnological solutions, thanks to their well-known design and engineering capabilities, oreven flexible and efficient partners for the outsourcing of production processes.[6]
8)Thepresence of strong local SMEs provides MNEs with an opportunity to take over specializedfirms endowed with complementary resources and know-how. Last,
9)Italy offers a high qualityof life.[7]
According to Il Sole 24 Ore, the following are the strengths of Italy:
1)Strong tourism potential
2)Still important role of industry
3)Improved product range and highly profitable niches (luxuryclothing, household appliances, foodstuffs, machinery)
4)Low household debt and strong saving capacity
5)Government debt predominantly held by residents
From a legal standpoint, Italy has signed 93 bilateral investment treaties (BITs), 71 of which have been ratified.[8] Thefirst BIT was signed with Chad in 1969, but most of Italy’s BITs were concluded in the 1990s(50) and in the 2000s (28). Italy has also signed double taxation treaties (DTTs) with 93 countries, within andoutside the EU, to avoid double taxation on income and property.[9] Draft agreements withadditional countries are at the discussion stages. Furthermore, there are forms drawn upunilaterally by the tax authorities that can also be used to facilitate FDI.
FDI performance of the economy lags behindthat of most other economies in Europe.
A relatively low attractiveness of IFDI in Italy forIFDI is reflected in the UNCTAD survey of several prominent international companies andinstitutions.[10] Moreover, invariably, the most important international rankings that measurethe health and competitiveness of nations, including the World Competitiveness Scoreboardand the Competitiveness Index, assign lower positions on the list to Italy, which is not onlythe last in the club of small and large advanced economies, but sometimes even behind manyemerging markets. Italy ranks only 40th in the ranking on the World CompetitivenessScoreboard 2010 of the IMD [11] and 48th in the ranking by the Competitiveness Index 2010- 2011 of the World Economic Forum. [12]
However, the potential of Italy as a host for IFDI is much higher than that indicated by thecountry’s IFDI performance thus far. The current difficulties of the country, the Eurozonecrisis and the recent OECD downward revision of growth forecasts certainly do not encouragea recovery in the short term of IFDI in Italy; but if the reforms that the Montigovernment was able to introduce and that the Letta government has prepared and is at present preparing, achieve the objective of fiscal consolidation and at least partiallymitigate the well-known inefficiencies of the country (energy cost, infrastructure, legislation,and bureaucracy), favouring the recovery of Italy’s international credibility andcompetitiveness, foreign enterprises as well as Italian ones could increase their presence in thecountry by fully developing the growth potential stemming from the strengths of the Italianindustrial system.
The World Bank - IFC publication “Doing Business 2013” [13] sheds light on how easy or difficult it is for a local entrepreneur to open and run a small to medium-size business when complying with relevant regulations: it measures and tracks changes in regulations affecting 11 areas in the life cycle of a business:
1)Starting a Business
2)Dealing with Construction Permits
3)Getting Electricity
4)Registering Property
5)Getting Credit
6)Protecting Investors
7)Paying Taxes
8)Trading Across Borders
9)Enforcing Contracts
10)Resolving Insolvency and
11)Employing Workers
The “indicators” used refer to a specific type of business, generally a local limited liability company operating in the largest business city.Other areas important to business - such as an economy‘s proximity to large markets, the quality of its infrastructure services (other than those related to trading across borders and getting electricity), the security of property from theft and looting, the transparency of government procurement, macroeconomic conditions or the underlying strength of institutions - are not directly studied by Doing Business.
Looking at how Italy and comparator countries rank on the various indicators as will as how Italy and China compare[14], the following information emerges:
Figure 1. How Italy and comparator economies rank on the ease of doing business
Figure 2. How Italy and comparator economies rank on the ease of starting a business[15]
Figure 3. How Italy and comparator economies rank on the ease of dealing with construction permits[16]
Figure 4. How Italy and comparator economies rank on the ease of getting electricity[17]
Figure 5. How Italy and comparator economies rank on the ease of registering property[18]
Figure 6. How Italy and comparator economies rank on the ease of getting credit[19]
Figure 7. How Italy and comparator economies rank on the strength of investor protection index[20]
Figure 8. How Italy and comparator economies rank on the ease of paying taxes[21]
Figure 9. How Italy and comparator economies rank on the ease of trading across
borders[22]
Figure 10. How Italy and comparator economies rank on the ease of enforcing contracts[23]
Figure 11. How Italy and comparator economies rank on the ease of resolving insolvency[24]
These figures can be interestingly compared with the figures relating to China.
2. Choice of corporate structure for a foreign subsidiary in Italy
2.1.S.p.A. vs. S.r.l.
Foreign investors who decide to set up a subsidiary company in Italy generally prefer a Società a responsabilità limitata (S.r.l.), i.e. a private limited liability company, which is suitable for companies with a sole “quotaholder”(or few “quotaholders”) and for larger operations a Società per Azioni (S.p.A.), i.e. a limited liability public company/stock company.
In both types of company the liability of the shareholders (in an S.r.l.: “quotaholders”) is limited to the par value of their shares (in an S.r.l.: “quotas”).
The S.r.l. is by far the more popular type of limited company in Italy. An S.r.l. cannot be listed on the stock exchange.With the Italian Act on Company Law (Legislative Decree 17 January 2003, No. 6), in force from January 1, 2004, the personal character of the S.r.l. has been reinforced, together with the large degree of freedom given to its members to agree the terms and conditions to govern the company. The SRL places itself midway between a limited liability partnership (società di persone) and a public company.
An S.r.l. has simpler rules for passing shareholders resolutions (without holding a formal meeting); the transfer of quotas may be subject to the approval (gradimento) of all members (Art. 2469, para. 2, Italian Civil Code, hereinafter CC); it is possible to exclude a member for just cause (Art. 2473-bis CC)
An S.r.l. may issue bonds (so-called “titles of debit” – titoli di debito) that however may be subscribed only by professional investors (Art. 2483 CC).
Certain activities may only be conducted by an S.p.A.
An S.p.A. may issue bonds and other “financial instruments” carrying patrimonial rights but with no voting rights at the shareholders meeting (Art. 2346, last para., CC) in return for contributions (by shareholders or third persons) of cash, receivables or other assets, including contributions in kind such as work or services or other assets (e.g. know-how).
An S.p.A. can issue special categories of shares, such as: azioni di godimento (issued to owners of reimbursed shares), connected shares (azioni correlate) that grant rights connected to the results of the corporate activities in a given sector (Art. 2350, para. 2, CC), savings shares (azioni di risparmio, if the company is listed; this is the only category where bearer shares are permitted), redeemable shares (azioni riscattabili, Art. 2437-sexies CC), shares in favour of employees (azioni a favore dei prestatori di lavoro, Art. 2349, para. 1, CC).
Bonds (obbligazioni, Art. 2411 CC) and other participating financial instruments (strumenti finanziari partecipativi, Art. 2346, no. 6), CC) carrying patrimonial rights or also administrative rights (for example: duty of the Board to report periodically on status of the investment, right to appoint a member of the Board), but only limited voting rights (Art. 2351, no. 5), CC) in return for the contribution (so-called apporto) by shareholders or third persons, of works, services or other assets (e.g. cash, goods, receivables, know-how, etc.), such contributions are not recorded as capital contributions.
Furthermore an S.p.A. can set up separate funds reserved for a specific transaction (Art. 2447-bisCC) having a value not exceeding 10% of the net assets of the company.
Special care must be taken when choosing the type of company, especially where there will be minority shareholders in the company.
In such cases it is advisable to choose the Società per Azioni (public limited company/stock company) rather than the Società a responsabilità limitata (private limited liability company), for the reasons given hereafter on the protection afforded to minority shareholders (“quotaholders”) in the Società a responsabilità limitata.
The form of the parent company is irrelevant to the choice of company type.
As regards the regulatory restrictions, to proceed with the setting up of a company it is necessary, inter alia, for the company to have authorisation from the competent authority where it intends to carry out determined types of business.
In the case of banking activity, for example, authorisation is required from the Banca d’Italia. Also in the case of insurance businesses, authorisation is required from the Minister of Trade and Industry. Professional sports clubs must also be registered on the Companies’ Register and to do so must demonstrate that they have obtained affiliation approval from the CONI Federation.
2.2.Società per Azioni (S.p.A.).
The minimum capital for an S.p.A. is of € 120.000, with a higher minimum for banking, insurance and mutual funds. An S.p.A. may have a single shareholder, but the capital must be fully paid up.
The contributions of each participant are represented by shares.
In the event of contributions in kind (property in kind or credits), a sworn expert’s valuation (by a court-appointed expert) of such contributions is required.
Members of an S.p.A. are not permitted to contribute undertakings to supply personal activities or services in favour of the company.
The company may be managed by a sole director (Amministratore unico) or by a Board of directors (Consiglio di amministrazione) appointed by the shareholders meeting (“ordinary” governance structure), which also appoints statutory Board of auditors (collegio Sindacale), consisting of three (or five) effective and two substitute members (sindaci).
Alternatively the management may be entrusted to a management board (Consiglio di gestione) of at least two members, appointed by a supervisory board (Consiglio di sorveglianza) of at least three members, which is responsible for the functions of the Board of statutory auditors and with those functions reserved in the traditional model to the shareholders meeting: the members of the supervisory board are appointed by the shareholders meeting (“dualistic” governance structure, two-tier model).