LEGAL FRAMEWORK AND NATURE OF THE CONTRIBUTION

PFIs may be issued in exchange for contributions of any kind, including those other than cash contributions. These may include contributions in kind, receivables, as well as the provision of work or services (pursuant to Article 2346, paragraph 6 of the Civil Code). Such contributions do not grant the subscriber the status of shareholder; rather, they confer specific economic rights (and, where provided, administrative rights) as defined in the company’s articles of association and in a dedicated set of terms and conditions. It is established practice to attach the terms and conditions to the shareholders’ resolution approving their issuance.

In this respect, corporate law grants broad statutory discretion in defining the content of PFIs, provided that the non-derogable prerogatives of shareholders are not affected or impaired. Any administrative rights that may be granted (e.g., board representation or veto rights over extraordinary transactions) must be carefully limited in scope and must not amount to a form of indirect corporate control.

ACCOUNTING CLASSIFICATION AND FINANCIAL STATEMENT IMPACT

The accounting classification of PFIs depends on the actual structure of the rights attached to them. Under Italian GAAP (OIC), in accordance with the principle of substance over form, two main scenarios are identified:

• Equity-like instruments, where the features are akin to risk capital (no repayment obligation and remuneration contingent upon profits): in such cases, they are recognized within shareholders’ equity.
• Debt-like instruments, where the issuer undertakes a contractual repayment obligation or guarantees a minimum return irrespective of the company’s financial performance: in such cases, PFIs are recognized as financial liabilities.

Particular attention must be paid to their treatment upon initial recognition, their disclosure in the notes to the financial statements, as well as to any subordination or convertibility clauses, whose accounting effects must be assessed consistently with both the relevant corporate law framework and the economic substance of the transaction.

TAX TREATMENT: DIRECT AND INDIRECT IMPLICATIONS

For direct tax purposes, the practice of the Italian Revenue Agency (notably Resolution No. 103/E/2008, Resolution No. 60/E/2018, and more recent rulings issued in response to advance tax inquiries) classifies PFIs based on the linkage between the remuneration and the issuing company’s financial performance:

• If the remuneration is entirely variable and contingent upon profits, the proceeds are treated as having a participatory nature, comparable to dividends.
• Where fixed or mandatory components are provided for, the rules applicable to investment income or interest expense apply.

Any convertibility into share capital must be assessed pursuant to Article 177, paragraph 2-bis of the Italian Income Tax Code (TUIR): the conversion of PFIs into equity interests may qualify for tax neutrality, provided that the contribution can be framed as a contribution in kind transaction under the relevant tax provisions.

For IRAP purposes, the classification of PFIs as either equity or debt instruments affects the non-deductibility of financial expenses or, in the case of equity-like structures, the adjustment of the value of production.

OPERATIONAL PROFILES AND PRACTICAL APPLICATIONS

The issuance of PFIs represents a financial engineering solution that can be effectively deployed in a wide range of contexts:

• Capitalization of SMEs and startups without altering the existing ownership structure;
• Incentivizing key executives or strategic collaborators (managers, consultants, advisors) through remuneration linked to the company’s performance;
• Structuring mezzanine instruments in M&A transactions, serving earn-out, retention, or co-investment purposes;
• Governance management through the granting of specific administrative rights (e.g., veto rights over extraordinary transactions, the right to appoint independent directors).

These instruments make it possible to overcome the rigidities of the traditional equity/debt model, thereby enhancing overall capital resilience.

DOCUMENTARY SAFEGUARDS AND EX ANTE ASSESSMENTS

For proper implementation, it is necessary to:

• adopt a duly compliant shareholders’ resolution, approved by the required qualified majority, with an express reference to the enabling provision set out in the articles of association;
• attach a detailed set of terms and conditions governing duration, economic rights, administrative rights, repayment scenarios, and any potential conversion clauses;
• assess accounting consistency, tax compliance, and ensure adequate corporate documentation in support of the transaction.

The terms and conditions must be drafted with due regard to the nature of the contribution, its valuation, and the issuer’s objectives, avoiding interpretative ambiguities that could give rise to disputes.

CONCLUDING REMARKS

Participating Financial Instruments represent a highly flexible legal mechanism, the effectiveness of which depends on the proper integration of corporate law, accounting, and tax considerations. The implementation of this instrument should always be preceded by a thorough assessment of the company’s corporate structure, its medium-term objectives, and its governance requirements.

At Nohema, we assist companies, innovative startups, and professionals in the structuring, drafting, and technical assessment of Participating Financial Instruments, adopting a multidisciplinary approach that integrates legal, tax, and accounting perspectives. We handle the preparation of the relevant articles of association and regulatory documentation, the underlying economic valuations, and the analysis of tax implications, supporting the client throughout all stages of the transaction.