Circular letter no. 6/E dated March 30, 2016 deals with the tax aspects of the LBO transactions by providing the relevant guidance as to the tax implications of the transaction. Here below is a brief summary of the main elements outlined by the Tax Authority.
1.      Interest expenses deductibility
Innovatively and departing from the practical application of the local offices, the Tax Authority clarified that interest expenses on financings suffered by the SPV to purchase participations are to be considered, in principle, aimed at the acquisition of the target and as such “inherent” for tax purposes, therefore, deductible to the extent provided for by the ordinary rules (30% of EBITDA limit) and according to the transfer pricing rules, where applicable.
2.      Carry-forward of tax losses and interest expenses in case of merger
For LBO transactions concluded with the merger (including reverse merger) of the target (i.e. MLBO) it is possible to obtain the disapplication of the anti-avoidance rule under art. 172, paragraph 7, IITC provided for the tax losses and interest expenses carry forward. To this end, the Tax Authority, noting that the SPV in the majority of cases does not meet the requirements imposed by the so-called “vitality test” and the “equity limit” provided by the aforementioned article 172, paragraph 7, stated that the taxpayer has the right to file a ruling requesting the disapplication of the anti-avoidance rule, clarifying that (i) to overcome the "vitality test”, it will be sufficient demonstrating the carrying out of operations instrumental to MLBO and (ii) with regard to the limit of the equity, the initial capital injections at the SPV incorporation (presumably operated in the 24 months preceding the transaction) should be not “sterilized” since they will be considered as "physiological" to the transaction.
3.      Intercompany Services
The Tax Authority clarified that the fundraising made by the foreign shareholder outside of the group, carried out in the interest of the SPV, must be considered as an intercompany service and as such, it shall be remunerated at arm's length, in accordance with the transfer pricing rules.
4.      Deductibility and VAT treatment of costs for services charged by the foreign fund manager
Costs for services provided by the private equity fund to the SPV or the target are not deductible, for lack of inherence requirement, in the hand of the SPV or the target where it is clear that the aforementioned services are exclusively provided in the interest of the fund and its unitholders. On the other hand, if the inherence requirement is met, the congruity of the service price must be nevertheless assessed.
The Tax Authority also clarified that the VAT paid in connection with the aforementioned service is not deductible for the SPV (or the target after the merger) where the SPV only carries out an activity of mere participations holding, without interfering in the management of the target company (i.e. pure or static holding).
5.      Withholding tax on interest related to foreign loans in the event of debt syndication structures
The Circular letter clarified that in case of debt syndication carried out through the so-called Italian Bank Lender of Record – IBLOR, the withholding tax is applicable on the interest payable to the “indirect” foreign financing entity.  
For conducts not conforming to the afore-mentioned treatment preceding the Circular letter publication, the Tax Authority clarified that no penalties will be applied since the objective situation of uncertainty in the rule application.
6.      Tax treatment of financing from foreign shareholders
Interest expenses on loans advanced by foreign shareholders are, in principle, deductible based on the interest expenses deductibility general rule (30% of EBITDA limit), as well as the transfer pricing rules.  The Tax Authority clarified, however, that in the event that the actual substance of the transaction is a capital contribution rather than a financing, the tax offices are entitled to requalify the transaction, challenging the deductibility of the related interest expenses.
For conducts not conforming to the afore-mentioned treatment preceding the Circular letter publication, the Tax Authority clarified that no penalties will be applied since the objective situation of uncertainty in the rule application.
7.      Withholding tax on dividends and capital gains realized in the “exit” phase
The application of the Double Taxation Agreements (“DTT”) and EU Directives tax relieves is possible provided that the “group structures” show the necessary "economic substance" and that the intermediate companies do not act as mere "conduit companies", thus not performing "a real and genuine economic activity”.
This being said, the Circular letter clarifies that the Tax Authority may challenge:
 i.    the DTT reduced withholding tax and the withholding tax exemption provided by the EU Parent-Subsidiary Directive, as well as the 1.375% domestic “reduced” withholding tax (under art. 27, paragraph 3-ter Presidential Decree 600/1973) on dividends, if the recipient company has not economic substance;

1. the capital gain (realized on the sale of target participation) taxation in the seller’s country provided by the DTT (de facto attracting the capital gain taxation in Italy), if the seller company has not an economic substance or was set up in order to achieve undue tax benefits with the lacking of valid economic reasons.