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How foreign investors can boost IRR of their investments in Italy

Commento a Decisione Giurisprudenziale - A cura di Fulvio Graziotto - Avvocato in Sanremo (Imperia)

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Under condition some key rules are observed, Italy is a great Country to invest into.

In general, foreign investors and groups are very much focused on nominal IRR (internal rate of return), but with Italy this might prove to be a partial approach.

One of the most though concepts that international observers understand is the complexity of the Italy law system itself (which is based, since the ancient Rome, on civil law), but in particular the unbelievable tax rules, that considerably increase risks of tax burden, as well as the costs involved for compliance.

Italy is not the only country having a stringent tax system, but it is by sure one of the hardest to fully comply with.

Besides the costs of tax compliance, the risk of tax audit generating heavy penalties and additional taxes on income (and VAT tax) is material in any business area.

What shall a foreign investor do under such a scenario to avoid undertaking unnecessary risks?

Are there any tips that might help to comply with the law, reduce costs and boost actual IRR of investments in our Country?

The answers is yes, there are some measures that help a lot.

Whereas cross-border businessmen and managers are, in general, highly skilled in the business practices, most of them fail to catch the hidden cost of managing the legal risks under our system of law.

Of course, every industry has its own fundamentals, with different issues also in respect of the legal obligations, but at the end the proper management of the legal risks plays a role of utmost importance.

A “Legal Due Diligence" process can help to identify the main areas of the audit process for the many sets of juridical relationships that a company needs to manage.

The basic concept is very close to the features of a good operating system software configuration: to reduce risks, the first move is reducing the possible surface of attack.

Like an antivirus that controls streams of data to intercept threats, a good legal risk management approach must identify the interactions of the company and prevent risks by trying to implement agreements with proper clauses, that not only can reduce the "surface of attack" under a legal perspective, but also improve the rate of success in case of litigations, as well as ease and fasten the enforcement of judicial decisions once they are released.

It might seem plain theory, but it is not: good companies and investors try to actively manage all manageable factors, and do their best to act on the root of problems, not only on their effects.

Similarly to the PDCA (plan-do-check-act) loop cycle used in the total quality concept, legal risk management is crucial to define the perimeter of risk and to improve results delivered to shareholders or, in general, to any stakeholders.

Specifically in the tax compliance area, the difficult interpretation of law is a factor that generates a two-phase risk: in the first phase, substantial risks of non-compliance to the tax law, and later a second phase risk of wrong approach to the tax litigation procedure rules.

An inefficient approach and management of these two phases may lead to a catastrophic outcome, burning out the whole results even if the business was run by very effective management.

Most of law firms enter on stage once the problem is risen, but this is too late: the ideal approach is based on a permanent matrix-team, including native speaking professionals with strong skills in all areas of law of the Italian jurisdiction, and a mindset focused to prevention of legal risks in such a way that does not jeopardize the business.

Experts that put aside formal contracts, but are instead able to "soften" the text of any agreement, and converting it in something similar to a normal communication that does not sound suspicious or risky to the external counterparties (customers, suppliers, and so on).

What counts for shareholders, at the end, is the actual IRR net of delayed burden, especially in the current competitive arena: the world is more and more interconnected, markets and logistics are liquid, and managers tend to focus on the primary activities without attributing enough weight to support activities (and those who know Michael Porter's concept of "chain of value" know what this means exactly).

Nowadays there is not anymore room for rough management of support activities: they must be handled effectively, and legal risk management is fully part of them.

In short, even if this is a universal rule, as far as Italy is concerned it is mandatory: to boost IRR, tax & legal risk must be managed proactively.

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