With the recent Answer no. 622 of 23 September 2021, the Italian tax Authority stated that the lack of one or more prerequisites reported by Circular no. 25/E of October 16, 2017, does not determine in se the automatic classification of the carried interest proceeds as employment income, with the consequent application of the marginal tax brackets (ranging from 23% to 43% of the income) instead of the more favourable taxation of 26% applicable to income-qualified as having a “financial” nature. According to the Answer in comment, to qualify the income arising from the carried interest as financial income, it is required to carry out an analysis aimed at verifying, case by case, the suitability of the investment to determine the alignment of the interests and risks of the managers and other shareholders that allows the financial/capital nature qualification of the return.
The Italian tax Authority, with the Circular letter no. 25/E of October 16, 2017 released specific guidelines regarding the taxation of the carried interest proceeds. The Circular 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 capital or other income, despite the existence of an employment relationship with the carry holders, if several conditions were met:
a) the carry holders (employees and directors) involves 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 case of the company or entity (so-called minimum investment);
b) 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 as provided by the statute or regulation (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;
c) 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).
Taking reference to the tax Authority orientation it is recommended to carry out a case by case analysis to verify if, even in the lack of one or more requirements set out above, the income arising from the carried interest scheme may be qualified as financial and not as employment income.
Davide Cotroneo
davide.cotroneo@bdo.it
Gianluca Marini
gianluca.marini@bdo.it