Italian carry tax rules ‘increase competitiveness’

The country’s tax authority has clarified rules on whether carry will be taxed as capital gains or income.

Italian fund managers must personally invest a minimum 1 percent of a private fund’s total equity to ensure its share of carried interest continues to be taxed as capital gains, the Italian Revenue Agency has said.

Tax reform introduced in April stated that carry earned by Italian managers that did not meet the 1 percent threshold will be taxed at the higher income tax rate.

Carry is taxable at the lower capital gains rate of 26 percent if the 1 percent threshold is satisfied and the fund in question is Italian or an EU alternative investment fund, compliant with the Alternative Investment Fund Directive, the Italian Revenue Agency clarified this month.

Where the criteria are not satisfied, carry would be taxed at the personal income tax rate, the top rate being 43 percent.

The IRA said the move “gave certainty” to financial services firms appraising the prospect of operating in Italy, and made the country “more attractive and competitive”.

The clarification comes amid shifting legal treatment of carry globally. In Sweden, following a recent legal case, a proportion of carry is now likely to be taxed as salary at 60 percent, potentially with retrospective effect.

In the US, a proposal to end carried interest tax deduction for hedge funds was put forward in September as part of the US government’s US Tax Reform Framework. Tax experts expect the proposal to be extended to private equity in the future.