A recent report on the future of the Single Market done for the European Commission by Enrico Letta discusses the Eltif’s role in financing the EU economy as part of the Capital Markets Union. “It is improbable that this instrument will achieve mass-market status and offer significant funding for European companies without adequate tax incentives,” Letta wrote, noting that “illiquidity indeed needs somehow to be compensated”.
Member states active
The recently-updated Eltif regulation does not establish a uniform EU tax treatment that is applicable to all Eltifs, explained Dr Stefan Staedter, a partner at Arendt & Medernach, speaking at an Efama webinar. However, he noted that some of the member states have been active.
In Italy, for example, investments in Eltifs that meet certain requirements - being an individual savings plan, provide Italian tax residents with a statutory exemption for capital gains, which Staedter explained, is normally taxed at 26 percent. Inheritance is also exempted. “In order to qualify for such an exemption, investors must maintain a minimum holding period of five years and they need to make investments within a specific threshold,” he said.
“This is one example where an investor may have an actual benefit from investing in an Eltif rather than investing in another product,” explained Staedter.
Advantageous treatment
France also has a regime in which Eltifs are designed as part of an insurance wrapper, so the insurance fund invests. If the Eltifs are held for more than eight years, there is an advantageous tax treatment.
“Which is something where, if you look at some of the current initiatives at the European level, which could maybe be an inspiration for some of the other countries.”
Another example is Spain, where certain regions apply a special tax regime for Eltifs. However, he pointed out that doing this on a sub-national level might create competition. “The question is a little bit to which extent this is a system which is reliable for the entire country,” he said.
More attractive Eltif
“If we look to the future, we can see that there’s clearly that there is some initiatives, which aim to make the Eltif label more attractive,” Staedter commented.
There are already some moves in this direction on the EU level, he said, pointing to the reform of Solvency II, the prudential regime for insurance and reinsurance undertakings in the EU. Staedter pointed out that this provides for a lower capital charge at the level of a Solvency II investor if the investor invests in an Eltif.
“In certain cases, it will be possible to lower the charge from 49 percent to 22 percent,” he explained. “Which means in a nutshell that a Solvency II investor may invest more cash in an Eltif compared to an investment in a non-Eltif.”
Rapid Eltif growth
The long-awaited Eltif 2.0 regulation entered into force in January 2024. This led to significant growth in Eltifs, with the number doubling from 57 in 2021 to over 100 today, with assets under management jumping from 2.7 billion euros to an estimated 13.6 billion.
Efama expects such figures to grow even further once the “final piece of the puzzle”, the Level 2 Regulatory Technical Standards, has been finalised. This is expected to happen in the coming months.
There was a disagreement between the European financial regulator Esma and the European Commission on how these rules should be written. Esma focused on minimum liquidity, Staedter explained. The European Commission took a different tack:
“They have taken into account the specific nature of an Eltif as a semi-liquid product with illiquid assets and which contains, to a certain extent its own protection mechanism,” he said.