Individual Long-term Savings Plans (PIRs)

One of the few certainties in investing is the taxes on gains that you’ll eventually have to pay. However, there is an investment tool designed to encourage medium- to long-term investment in Italian companies, which offers significant tax advantages. This tool is called the Individual Long-Term Savings Plan (in Italian PIR – Piani Individuali di Risparmio). Let's look at what a PIR is and how it works to understand if it’s right for you.

What is a PIR?

A PIR is a way to invest in shares and bonds issued by Italian companies, allowing you to benefit from a substantial tax break. However, several conditions must be met in order to qualify for this benefit, including:

  • at least 70 per cent of the portfolio must consist of shares and bonds issued by Italian companies;
  • the investment must be held for at least five years.

The tax advantage is significant: it involves full exemption from taxes on income derived from PIR investments (such as capital gains, interest, and dividends), as well as exemption from inheritance tax. In Italy, financial income is generally taxed at a rate of 26 per cent.

There are two types of PIRs: the traditional or standard PIR, available since 2017, and the alternative PIR, introduced in 2021, which targets experienced investors with substantial assets.

Creating a PIR

IA PIR is essentially a 'container' that, like an investment fund or ETF, you can buy or create. You can invest through a PIR in two main ways:

  • managed savings instruments, such as investment funds , insurance contracts, or managed portfolios. The most common form of PIR is mutual funds, known as PIR funds or PIR-compliant funds. The financial intermediary will ensure the PIR rules are followed, except for the holding period, which is up to you;
  • 'do it yourself' PIR, by opening a custody account with a financial institution. In this case, however, you are responsible for ensuring all the rules are followed.

PIRs are especially useful if you want to invest a portion of your savings consistently in shares or bonds issued by Italian companies. The tax benefit allows for potentially higher returns than similar investments subject to taxes on income.

The tax incentive for PIR investors is intended to help Italian companies raise funds in the financial markets through the issuance of shares and bonds. In Italy, this direct financing channel is relatively underdeveloped compared to other advanced economies.

PIR costs

Be very mindful of costs if you go through a financial intermediary to 'buy' a PIR. Products offered by intermediaries, such as PIR funds, tend to have higher costs than other similar financial products. These expenses can significantly reduce or even cancel out the tax benefits.

For long-term investments like PIRs, even slightly above-average annual management or performance fees can have a major impact on the final return.

PIR rules in detail

Complying with PIR rules is essential to receive the tax benefit. If not, you'll have to pay ordinary taxes on income, plus interest. Here are the main rules:

Eligible subscribers: PIRs can only be subscribed by individuals residing in Italy, not by companies (with exceptions for pension funds and welfare funds, which receive a reduced tax benefit). Minors can also hold a PIR.

Portfolio composition (for standard PIRs):

  • at least 7 0per cent of the Plan must be invested in financial instruments issued by Italian companies (or European ones with a permanent establishment in Italy);
  • of that 7 per cent, at least 25 per cent must be in companies not included in the main FTSE MIB index (or equivalent), and 5 per cent in companies not included in either the FTSE MIB or the FTSE Mid Cap index (or equivalent). This requirement ensures the inclusion of smaller companies in the Plan;
  • you may invest a maximum of 10 per cent of the PIR in a single company.

Investment limits: you can only hold one PIR. For standard PIRs, the annual investment can range from a minimum of €500 to a maximum of €40,000, with a total limit of €200,000. For alternative PIRs, the annual cap is €300,000, with a total cap of €1.5 million.

For alternative PIRs, at least 70 per cent must be invested in financial instruments issued by Italian companies (or European ones with a permanent establishment in Italy) that are not included in the FTSE MIB, FTSE Mid Cap, or equivalent indexes. Therefore, alternative PIRs include a larger share of small companies and are considered riskier.

For the same reason, they are harder to sell (i.e., less 'liquid'). As such, alternative PIRs are typically set up through the subscription of closed-end mutual funds and are aimed at more knowledgeable investors with relatively high assets. The maximum investment limits are also much higher than those for standard PIRs.

Holding period requirement: You must hold the investment for five years. Selling a PIR early disqualifies you from the tax benefit. You can sell the financial instruments within the PIR early, but to retain the tax benefit, you must reinvest the proceeds in equivalent instruments within 90 days.i.

Important

Due to the required holding period, avoid investing in a PIR with funds you may need urgently.

Risks to watch out for

All investments carry risks. In the case of PIRs, pay special attention to:

  • the level of risk: PIRs allocate a large share of assets to shares and bonds issued by companies, including small ones, so they can be quite risky;
  • limited diversification, since they are focused solely on Italian companies;
  • fund costs, especially with asset management;
  • the risk of losing the tax benefit: if you fail to comply with the PIR rules, you lose the tax advantage. Remember, above all, that to qualify for the tax benefit, investments must be held for at least five years – so avoid using money you might need in the short term.

See more articles in these categories:

Did you find this content useful?

Related contents