Letta Report's ELTIF Recommendations: Integrating National Tax Incentives

The recent Letta Report on strengthening the EU Single Market might have significant implications for ELTIFs. This article examines the recommendations of the Letta Report and their potential impact on ELTIF structures, considering existing national tax regimes.

The Letta Report and Its Link with ELTIFs

Enrico Letta, former Italian Prime Minister, published his report on the future of the EU Single Market in April 2024. The report aims to boost EU competitiveness and further develop the Capital Markets Union (CMU). It emphasizes the need to mobilise private capital and connect the real economy with European citizens' savings.

Letta Report explicitly acknowledges the advantages of the ELTIF 2.0 reform:

"The introduction of a EU-wide scheme allowing private savers to invest in alternative funds offers several benefits: i) It provides SMEs and other non-listed assets with much-needed resources, particularly in markets traditionally underfunded in Europe; ii) It democratizes investment, opening up possibilities for retailers to access investments previously exclusive to professional investors and high-net-worth individuals; iii) It contributes to the creation of a European market for alternative assets by feeding resources into European alternative asset managers and therefore contributing to the CMU."

Boosting ELTIFs Through National Tax Incentives

While the report does not explicitly focus on ELTIFs, its acknowledges the importance of tax considerations and smart taxation of ELTIFs as conduits of long-term vehicles. The report suggests creating a "Savings and Investments Union," which could potentially incorporate ELTIFs as a key investment vehicle:

"However, it is improbable that this instrument will achieve mass-market status and offer significant funding for European companies without adequate tax incentives. Illiquidity indeed needs somehow to be compensated. We suggest launching a new European scheme which could integrate a national tax incentive with the ELTIF. The exact amount of the tax benefit could be left to be determined by each Member State, but it should be sufficiently attractive. The EU legislation could establish a minimum threshold for the incentive to ensure its effectiveness."

ELTIF Recommendations of the Letta Report - Wishful Thinking or Way Forward?

Could Letta Report's emphasis on harmonising European regulation create a momentum for a new pan-European scheme integrating national tax incentives with the ELTIF framework? It is widely known that the EU has limited competence in harmonizing taxation rules and procedures, particularly in the area of financial services. While the EU can propose and implement certain harmonisation measures, the extent of its competence is constrained by the need for unanimous decision-making among Member States and adherence to EU principles such as subsidiarity and proportionality.

Nevertheless, as the recent progress on the Council FASTER Directive, the EU can achieve slow progress on new rules that make withholding tax procedures across Member States more efficient. Realising the ambition of the Letta Report would require Member States to agree to the following:

• Standardized tax treatment across EU member states for ELTIF investments.
• A pan-European tax incentive scheme for long-term investments through ELTIFs.
• Enhanced cooperation between national tax authorities to facilitate cross-border ELTIF investments.

Implications of Tax Incentives for ELTIF Structures

Several EU member states have already implemented tax incentives for ELTIFs. In particular, Italy offers tax exemptions on income from ELTIF investments for individual investors, and Belgium has introduced a tax Decree clarifying the tax treatment of ELTIFs.

The integration of national tax incentives with ELTIFs could also impact existing ELTIF 2.0 structures:

• Master-feeder structures would potentially need to be adapted to accommodate harmonized tax treatment.
• Increased transparency requirements for fee structures in master-feeder ELTIFs.
• Potential simplification of cross-border ELTIF distribution due to standardised tax treatment.

Conclusions - ELTIF Taxation Across the EU

The Letta Report's recommendations provide a framework for enhancing the attractiveness of ELTIFs as investment vehicles. Integrating national tax incentives with the ELTIF structure could significantly boost their appeal to both retail and institutional investors. While the pathway to the successful implementation of Letta's recommendations is unclear, it is absolutely clear that with growing momentum behind the ELTIF 2.0 reform, EU's policymakers will find themselves under more pressure to prioritise taxation related actions that favour ELTIFs in the coming years.