Italy bucks the trend on carry

Carried interest will be taxed as capital gains, rather than at the higher rate of income, provided fund managers meet three conditions.

Carried interest in Italy will generally be taxed as capital gains from June 23, not employment income as was previously the case, following a ruling by the country’s tax authority.

The new tax rate will be 26 percent, considerably lower than the income tax rate which peaks at 43 percent.

The new tax rules apply when employees and managers have invested a minimum aggregate one percent of the entire investment made by the fund, and after all other investors have cashed an amount equal to the capital invested plus a minimum return on it.

Employees and managers must retain their investments for a minimum five years, or until the exit from the investment by the fund to qualify for the lower tax rate, the rules also state.

“The taxation of carried interest has been long debated in Italy, with tax authorities arguing that it should qualify as employment income as it is paid in relation to the employment/directorship relationship,” law firm Hogan Lovells said in a client note.

Private fund managers should review the terms and conditions of employee and manager incentives to check they meet the conditions of the revision, the firm said.

The ruling is the second regarding carried interest to have been made in the past month. The Swedish high court ruled in the reverse direction, sparking criticism from the country’s private equity association.

The UK, which generally taxes carry as capital gains, last year excluded it from an 8 percentage point reduction in capital gains tax. The treasury also began taxing carried interest wholly as income if deals last fewer than three years, and partly if groups withdraw from them within 40 months.

During the US election campaign, President Donald Trump said he will begin to tax carry as income, but whether the change will materialise is unclear.