Hogan Lovells - Italy: Regulation of the MEF on ethical and sustainable finance

21/01/2023 – The new requirements for the status of ethical and sustainable banking operator was published on the Official Gazette. Credit institutions satisfying these requirements will profit from tax benefits.

Jeffrey Greenbaum and Claudia Colomba - Hogan Lovells Studio Legale, 27 Feb 2023 - 10:15

The new rules of the Ministry of Economics on the implementation of Article 111-bis of the Consolidated Banking Act (CBA) regarding ethical and sustainable finance (the “Regulation”) were published on 21 January 2023. Tax benefits will accrue to  credit institutions meeting the requirements set out in the regulation. 

According to the Regulation, in order for a credit institution to qualify as ethical and sustainable, all the following requirements must be met:

  • Loans must be granted to legal entities only following successful assessment, on the basis of specific internal procedures, of the social-environmental impact of the loan and of the financed entities, in accordance with internationally recognized and established ethical rating standards. Loans granted to entities that, for instance, are engaged indirectly in the production or exchange of goods or services whose regular use violates human rights, which have been found responsible for serious violations of human rights, serious violations of individual rights in situations of war or conflict, or serious damage to the environment or which, in their activities, use energy derived exclusively from non-renewable sources will not be considered as respecting these standards;

  • The relevant credit institution discloses loans to legal entities, and the criteria used for their disbursement, in a dedicated annual report, to be published on the website, in compliance with the rules on the protection of data privacy personal;

  • At least 20% of the loans must be granted to social enterprises, having the features indicated in the Regulation;

  • Profits and management leftovers, as well as profit reserves however denominated, shall not be distributed to equity participants, holders of equity financial instruments and personnel, not even in an indirect manner. Profits shall be reinvested in the bank's own business;

  • The governance structure of the credit institution must respect certain characteristics. For instance, the number of shareholders must be greater than 200 and no shareholder having more than 10 percent of the share capital must be able to exercise voting rights, in any manner;

  • In addition to rules on policies and remuneration and inducements issued by the Bank of Italy, appropriate remuneration policies ensuring that the credit institution’s highest compensation is no greater than five times average compensation, to be calculated according to the Regulation.

Credit institutions meeting these requirements, as certified by both the management body of the credit institution and a legal auditor or a specific certifying entity, will profit from a tax benefit amounting to the possibility to deduct for tax purposes, within the annual expenditure limit set in Article 111-bis, paragraph 3, of the CBA (currently set at €1 million), an amount corresponding to 75% of the sums allocated to equity increase, i.e. to legal reserve or to a special non-distributable reserve, when approving the financial statements for the year.

Next steps

The Regulation entered into force on 5 February 2023.

The implementation of the Regulation, along with the associated tax reliefs, represents a great incentive for banking institutions to lower their social and environmental impact by conducting more ethical and sustainable operations.

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