1. General overview.
Under Art. 60 of Law Decree No. 50 of April 24, 2017 (converted by Law No. 96 of June 21, 2017), income from direct or indirect participation in companies, entities or undertakings for collective investment (“UCIs”) (resident or established in Italy or in a jurisdiction allowing an adequate exchange of information) derived by their employees or directors or employees/directors of their related parties or managers (the “Beneficiaries”), and arising from shares or other similar financial instruments having enhanced economic rights (the “Qualified Instruments”) is deemed as financial income subject to a 26% flat tax.
The application of the carried interest regime is subject to the following conditions:
- the total investment commitment of all Beneficiaries represents an actual investment of at least 1% of the total investment made by the UCIs or net equity in case of companies and other entities;
- income from the Qualified Instruments accrues to the Beneficiaries only after all the shareholders/unitholders have received a return equal to the invested capital plus a minimum yield as provided in the by-laws or regulations or, in case of change of control, to the extent that the other shareholders or investors have realized a sale price at least equal to the invested capital plus such minimum yield;
- the Qualified Instruments are held by the Beneficiaries (or by their heirs) for at least 5 years, or for a shorter period in case of a change of control or change of management.
2. Tax treatment of the income arising from the Qualified Instruments.
If the above mentioned conditions are met, the qualifying carried interest schemes are taxed on the basis of the rules provided for income having a financial nature. More in details, the income arising from the Qualified Instruments gives rise to the application of a 26% substitute tax.
In the absence of such conditions, the income arising from the Qualified Instruments will be considered, in a case-by-case basis, as income having financial nature or employment income (with the application of progressive tax rates up to 43% plus surcharges) depending on the different circumstances.
3. The recent guidance of the Italian Tax Authority.
With Principle of Law No. 5 of February 12, 2019 (https://bit.ly/2thmkKA) the Italian Tax Authority clarified the scope of certain conditions required for the application of the carried interest regime in case of “qualified” financial instruments reserved by a company to its managers.
On the same day, the Italian Tax Authority also published Principle of Law No. 3 (https://bit.ly/2I8W5jR) and Ruling No. 50 (https://bit.ly/2Suf1yb) providing other minor guidance on the carried interest regime.
A. Minimum investment
In order to meet the minimum investment commitment condition, the Italian tax law expressly provides for an actual investment “of at least 1% (...) of net equity in case of companies (...)” (see condition (i) above); in this regard, it has been clarified that the net equity has to be calculated (according to the previous guidance expressed by Circular Letter No. 25/E of October 16, 2017, https://bit.ly/2ujM3Cu) taking into account the current values determined on the basis of an appropriate technical evaluation/report (so called, “perizia di stima”).
According to such interpretation, as a consequence of the literal content of the provision, the basis for the co-measurement of the minimum investment (of managers) should be calculated on the entire net equity of the company to the extent that it is not possible to circumscribe it to the (limited) capital invested only in participations of companies acting in a speficied sector (e.g., technology or digital sector).
B. “Extra return” deferral
According to the Italian Tax Authority, the sentence “have received a return” (see condition (ii) above) suggests to consider the accrual of the hurdle rate as not sufficient for the condition to be met; otherwise, in this respect, reference shall be made to the “payment” of invested capital and minimum yield to the other investors (including managers holding ordinary shares).
In particular, the Italian Tax Authority maintained that the deferred distribution of the carried interest represents a condition to be met for the applicability of the legal presumption of qualification of the income as capital income or other income.