Regulatory and tax implications on the new legal framework on carried interest

The taxation of carried interest under Italian tax law was introduced in Italy in 2017 by Article 60 of Law Decree No. 50.

The tax legislation concerning carried interest aims to make Italy as competitive as other EU countries on this matter. The new regime, under certain conditions, provides for carried interest to be deemed as an investment income (generally taxed at 26% tax rate) instead of another income, and first of all employment income (generally taxed with progressive tax rates ranging from 23% to 43%, in addition to social security contributions when applicable).

According to the new provisions, income and gains related to direct or indirect participation in companies, entities or collective investments undertakings held by employees or managers are taxed as an investment income if the following conditions are met:

1. residence: shares, units and financial instruments are issued by companies, entities and collective investments undertakings resident for tax purposes in Italy or in a State allowing an adequate exchange of information;
2. minimum investment: employees or managers hold at least 1% of the company’s or entity’s net equity or 1% of the overall investments made by the collective investments undertakings;
3. holding period: employees or managers hold shares, units or the financial instrument for at least 5 years; the holding period limit does not apply if, before 5 years, there is a change of control of the relevant company or entity or a change of the management company of the collective investment undertaking;
4. hurdle rate: all investors and shareholders have received, prior to the payment of the carried interest, an amount equal to the investment plus a minimum income as set out in the entity’s or company’s by-laws or in the regulations of the collective investment undertaking.

Please note that the new carried interest tax treatment implies particular analysis from the regulatory perspective where the carried interest should be considered in the context of the remuneration and incentive policies and practices regime applicable for UCITs and AIFMs as provided by CONSOB and the Bank of Italy Regulation for investment firms and asset managers on November 29th, 2007, as amended (the “Joint Regulation”). In particular, albeit with a minor effect, the Italian Surveillance Authorities have chosen to specify that the identification of carried interest is functional to the sole application of the rules on remuneration. To understand the reason of such perspective, it is worth noting that, pursuant to the Joint Regulation, the carried interest – which obviously is part of the profit of an asset manager – must be included in the concept of “variable remuneration” and, as such, is subjected to the relevant regime provided by the regulation in force.

On the other hand, the “share of profit attributed pro rata to the members of staff due to possible investments made in the UCITs or the AIFs is not considered carried on, provided that they are proportional to the effective percentage of participation in the UCITs or FIAs and not higher return recognized to other investors”. The proportionality measure of the profit compared to the investment made, as well as the actual correspondence to the performances recorded by other investors in the same UCI therefore constitute the discriminating elements to distinguish what falls under the variable remuneration discipline and what is instead excluded. However, it remains the case that the managers bear the burden of clearly identifying which part of the profit received by the personnel for the management of the UCIs exceeds the pro rata profit recognized to the other investors, and not consequently constituting carried interest.

It therefore follows that, where a member of the staff of an asset manager makes an investment in the units of a UCITs or AIFs managed by the manager to which it belongs and obtains profits that are not proportional to its participation and higher than those received by other investors in the UCI itself, then the excess part of profits deriving from the units/shares of the UCITs or FIAs would fall within the notion of remuneration.