Let's get to know PIR: Individual Savings Plans

What are PIRs

PIRs (Piani Individuali di Risparmio) are a form of investment provided for in the Italian legal system, with the 2017 Stability Law, and are aimed at directing Italians' savings toward small and medium-sized Italian companies so as to "self-finance" the national economy.

The Tax Advantages of PIRs

The advantage that PIRs offer the investor is loud and clear: total tax exemption on investment returns. In other words, you will not have to pay 26 percent tax on both income and capital gains produced by the investment. In addition, RIPs are exempt from inheritance tax but remain subject to stamp duty (0.2 percent per year of market value).

In order to obtain this benefit, certain rules must be followed since the PIR is not a financial product but a "legal container" of investment instruments: only if this container is properly filled and maintained then the tax benefit is available.

Unfortunately, we cannot be the ones to declare that the rules have been complied with ourselves; the Italian state requires a financial intermediary to do so. For this reason, opening a PIR can only be done under the administered savings regime, that is, within a specific contractual relationship for opening a PIR. This will obviously entail costs on the part of the intermediary.

The rules of PIRs

• Investor. The investor must be a natural person resident in Italy, even a minor.
• Holding time. The PIR must be held for at least 5 years; this applies to the PIR as a legal container and not to the individual securities contained therein.
• Minimum and maximum amounts. The minimum amount of a PIR is €500, the maximum amount depends on the type of PIR: for ordinary PIRs it is €40,000 per year (up to a maximum accumulated amount of €200,000), for alternative PIRs it is €300,000 per year (up to a maximum accumulated amount of €1,500,000). Beyond these amounts there is no tax benefit for the excess only.
• Instruments that can be included in the RIP. Securities can be either corporate holdings or debt securities held as individual securities or within collective asset management instruments (e.g., investment funds) with the "PIR compliant" label. Qualified corporate holdings, that is, those weighing more than 20 percent of the share capital of the company in which we have invested, cannot be included.
• Composition. At least 70 percent of the capital contributed to the PIR must be invested in securities issued by Italian companies, i.e., based in Italy or in the European Economic Area but having a permanent establishment in Italy. This is the "restricted portion" while the remaining 30% is completely unrestricted. Italian firms do not have to be listed on the FTSE MIB or even the FTSE Mid Cap for alternative PIRs, while ordinary PIRs are less restrictive: at least 5 percent of the restricted portion must be firms outside the FTSE MIB and FTSE Mid Cap and at least 25 percent of the restricted portion must be firms outside the FTSE MIB.
• Non-concentration. The securities contained in the RIP must be diversified: the weight that an individual company has on the capital contributed to the RIP cannot be more than 10 percent (for ordinary RIPs) or 20 percent (for alternative RIPs).
• Maintenance. All requirements must be met for at least two-thirds of each year (244 calendar days). So, if a security is sold, if a bond were to expire, or if a firm were to move location then the security could be replaced should this serve to meet the composition and nonconcentration rules. Capital gains or losses are considered as contributed capital therefore impact the composition and nonconcentration constraints.

RIP and crowdfunding

Crowdfunding investments aimed at Italian startups, SMEs or real estate companies are perfect candidates for inclusion in PIR. Since they are small and unlisted companies, they generally comply with the composition rules.

So, if by crowdfunding we have invested or plan to invest in at least 5 companies in equal parts, here we have a perfect alternative PIR portfolio (or at least 10 companies for an ordinary PIR portfolio) to which, if we wish, we can also add other securities for the unencumbered part.

In this way we add to the tax advantage of equity crowdfunding of deducting 30% to 50% of the amounts invested also the tax advantage of not paying taxes on returns and having a much higher net return.

How to open a PIR

A PIR can be built in two modes: the "ready-to-use" mode and the "do-it-yourself" mode. In the "ready-to-use" mode, the intermediary sells a PIR legal container that has already been filled with securities chosen by the intermediary, the most common example being a PIR-compliant mutual fund.

In the "do-it-yourself" mode, it is the investor who chooses the securities to put in the PIR container, and the intermediary will simply verify that the rules are followed over time. This is the mode that can be used for crowdfunding investments and can be done through a fiduciary mandate vis-à-vis the intermediary, which must be a company registered with the Register of Trust and Auditing Companies.

The costs of this mode can be: a one-time fixed cost for opening the relationship, an annual recurring cost in a fixed amount and/or as a percentage of the value invested. Costs may be higher in the case of alternative RIPs.

To assess the convenience of opening a PIR one must put costs and benefits in the balance: the costs are those of the trust mandate, the benefits are the tax benefits. The tax benefits will have a magnitude proportional to the absolute return we expect to make from our crowdfunding investment. This depends on both the total capital invested and the success of the businesses we have chosen. So, the greater these two components are, the more irrelevant the cost burden of RIP becomes.