New Italian tax guidelines on the carried interest scheme
In the reply to Ruling no. 311 of May 27, 2022, the Italian tax Authority provided clarifications in reference to Carried interest law (Article 60 of Law Decree No. 50 of April 24, 2017).
In order to correctly comply with its duties as a withholding agent, a Company asked the Authority to find out what is the correct tax classification to reserve for the carried interest paid by a Fund.
In particular, it was asked to know whether such proceeds could be qualified as financial income pursuant to article 60 of Law Decree no. 50 of 2017 and if such income maintains, for tax purposes, the legal nature of financial income pursuant to Article 44, paragraph 1, letter g) of the Italian Income Tax Act even if one of the three requirements set out in the aforementioned article 60 is not met.
The said art. 60, as per the interpretation of the Italian tax Authority via the Circular letter no. 25/E of 16 October 2017, specified that the proceeds arising from the holding of units, shares or financial instruments having special economic rights in Italian-resident or whitelisted undertakings in collective investment, companies or entities, directly or indirectly held by employees or directors, could be qualified as financial income, despite the existence of an employment relationship with the carry holders, if several conditions were met:
- The carry holders (employees and directors) involve an effective outlay (i.e. price subscription) equal to at least 1% of the total investment carried out by the collective investment undertaking or of the net asset in the case of the company or entity (so-called minimum investment);
- The right to proceeds is subordinated to the fact that all other shareholders or participants have realized an amount equal to the capital invested and the minimum return (so-called deferral of the hurdle rate) or, in the event of a change of control, is subordinate to the condition that the other shareholders or participants realized a selling price at list equal to the capital invested and to the above minimum return;
- The shares are held by employees and directors or, in the event of their death, by their heirs, for not less than five years or, until the change of control or replacement of the person in charge of the management (so-called minimum holding period).
The Revenue Agency analyses the minimum investment requirement that must be made by managers which, in the initial subscription phase, would not be below the one per cent threshold.
Although the amount of the investment made by the managers could not be considered compliant with the level provided, it is important to note that the amount subscribed, adding the amounts invested by each in the various shares, can be quantified in order to meet the one per cent threshold.
In addition, in evaluating the co-investment plan, it is important to note that the managers receive a fixed annual remuneration and a variable remuneration which for the directors/employees is equal to a percentage of the commissions that are charged to the Group's funds.
As regards, then, the exposure to the risk of loss of the capital invested by managers, there are no agreements that guarantee managers the right to reimbursement of the invested capital.
In light of the above, the Italian tax authority stated that the proceeds from the investment made by the managers could be qualified as financial income.