On 16 October 2017, Italian Tax Authorities released further official guidelines on the new tax regime related to carried interest. The document, an ad hoc Circular, provides significant clarifications on the scope, requirements and conditions envisaged under the new tax regime.
Clarifications on carried interest – Whit Circular 25/E of 16 October 2017, Italy’s Revenue Agency clarified, among other points, that: in addition to the directors/employees of UCIs, managing companies (SGRs) and target companies, the employees/directors of their advisory companies also may benefit from the new tax regime (Eligible Entities). Yet, only employees and directors of Eligible Entities may benefit from the new tax regime while professionals are explicitly barred. As far as eligible instruments are concerned, they may also be issued by industrial and trading companies not operating in the financial sector, whilst the 1% investment threshold includes shares/units directly or indirectly held in Eligible Entities by the Beneficiaries, also through trusts and foundations.
On the carried interest rule - Article 60 of the Decree introduced a non-rebuttable presumption whereby remuneration derived from certain carried interest schemes qualified as income from capital, or capital gain, is generally subject only to a 26% tax. Therefore, if the conditions envisaged under the new tax law are met, carried interest cannot be taxed as income from employment which is subject to individual income tax (Irpef) at progressive rates, up to approximately 45%, and social security contributions (ranging from 36% to 45%).
How does it works - Under the new tax regime income from direct or indirect participation in companies, entities or undertakings for collective investment (UCI) derived by their employees or directors or by employees or directors of other entities controlling, controlled by, or in charge of the management of the latter (the Beneficiaries) arising from shares or other similar financial instruments granting enhanced economic rights (so called carried interest) is deemed as income from capital or capital gain rather than employment income when the following conditions are met: first of all, the overall investment commitment of all the employees and directors entails an actual cash outlay of, at least, 1% of the overall investment carried out by the UCI or of the net equity, in case of companies or other entities.
Secondly, the above income accrues only after that all shareholders have received an amount equal to the equity invested plus the minimum yield provided by the by-law, even in the case of change of control.
And still, the fund managers maintain their investment for at least five years, or for a shorter period in the case of change of control or change of management. Particularly, the five-year holding period starts from the date of each subscriptions/acquisition. If an incoming employee/director acquires eligible instruments from a leaving employee/director, the accrued holding period is not inherited by the former Beneficiary.
Finally, eligible instruments are issued by UCIs, companies or entities that are tax resident or established in Italy or in a State that allows an adequate exchange of information with Italy.
Time matters – This new tax regime is applicable to income from eligible instruments that is received and/or realized by the Beneficiaries starting from the date of entry into force of Law Decree 24 April 2017, No. 50, thus from 24 April 2017.
The real risk also matters - The Beneficiaries should actually run a real risk in making the investment in the eligible instruments. Thus, the new tax regime would be disregarded if for subscribing the eligible instruments Beneficiaries receive financing from their employer, whose repayment is waived.
The five years holding period - If the carried interest is paid before the holding period is met, it is temporarily treated as financial income. However, if later on the eligible instruments are disposed of before the holding period is met, such income may be re-categorized into income from employment thus triggering Irpef, at progressive rates, and social security contributions.
A way to support investment efforts and planning - The new tax regime on carried interest provides an stimulating opportunity to implement management investment plans not only within the private equity field.
The indispensable chance to submit an advance ruling - However, income derived from carried interest schemes, lacking any of the previously mentioned requirements, does not automatically qualify as income from employment, therefore a case-by-case analysis would be required in order to verify the nature of the income. Italian tax Administration has confirmed that under these circumstances taxpayers may apply for an advance ruling on the income characterization of the carried interest.
Extra-time to enjoy the new tax regime – Italy’s Revenue Agency also confirmed that the new tax provision can apply to subscriptions made even before 24 April 2017 from which employees /directors derived income that has been subsequently paid. Furthermore, it was also confirmed that carried interest schemes approved before 24 April 2017 may be amended in order to benefit from the new regime.
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Italy’s Revenue Agency issued new guidelines on tax treatment of carried interest
