Starting from the enactment of the carried interest’s (CI) law, the Italian tax regime applicable has progressively aroused interest also thanks to the favourable approach taken by the Italian Tax Authorities (ITA).
The “carried interest” has been defined as a form of compensation granted to directors or employees of an entity or a collective investment fund (including the fund management company) holding directly or indirectly shares, quotas or financial instruments - in such entities or funds, including other related entities as well as non-Italian entities or funds resident or established in ‘white listed’ jurisdictions – having enhanced economic rights.
The tax provision entered into force on 24 April 2017 and is applicable only to proceeds qualifying as dividends or capital gains paid out as of this date even in case of previous subscription.
The new rule sets out the conditions under which the proceeds of a carried interest paid to managers (or employees) of certain entities must be qualified as financial income instead of employment or self-employment income.
The highlights of the new tax regime have been outlined here.
If all the requirements are met, CI is qualified as capital income subject to a 26 percent flat tax rather than as employment income at a progressive tax rate of up to 43 percent (plus regional tax, municipal tax and social security contributions).
Only recently, several clarifications regarding the application of the new provision have been provided by the Italian Tax Authorities (ITA).
Preliminarily, should the conditions set forth by the new provision be not met (in full or in part), the ITA specified - confirming the favourable approach - that a case by-case analysis is to be performed in order to ascertain which category the proceeds fall under (financial income or employment income) based on regulatory provisions and supporting documentation.
Consequently, where one or more of the conditions outlined are not met, this does not imply that the proceeds will be automatically qualified as employment income. In fact, profits might still benefit from the financial income qualification if factual elements or circumstances demonstrate that the nature of the CI implies a financial investment rather than top-up of ordinary remuneration.
The analysis can be asked by the taxpayer to ITA upon a ruling request. The different qualification of the proceed as “employment income” or “financial income” is also relevant for the employer acting as withholding agent responsible for the application of the relevant withholding tax.
Up to now, several ruling replies have been published by ITA.
In this respect, among the most significant, ITA confirmed that:
CI is not qualified as the income deriving from the assignment of the shares, quotas or financial instruments to the directors/employees (that is treated as employment income), rather as the income deriving from the possession or disposal (in the form of dividends or capital gains) of those shares, quotas or financial instruments;
CI includes the proceeds deriving from shares or quotas of advisory companies;
an actual cash-out is required by the directors/employees.
Based on the replies of the ITA, the key factors that could help the CI qualify as financial income include, among others:
suitable remuneration of the directors/employees (CI not to be seen as supplementary employment income);
a real risk exposure of the investors to the loss of the investment (total or partial) without any protection mechanism;
absence of direct links with the employment relationship (leavership provisions could have a negative impact on the analysis);
no limit to the transfer of the shares, quotas or other financial instruments after the perception of the CI;
ownership of the instruments having enhanced economic rights by investors other than the managers.