Navigating carried interest in Spain

Yes.

As from 1 January 2023, special economic rights derived, directly or indirectly, from holdings, shares or other rights, including success fees, which grant special economic rights in certain entities and are obtained by the directors, managers or employees of such entities, their management entities or entities in their group, can apply a 50% reduction of such employment income, which is included in the beneficiary’s general PIT base, and no reduction or exemption may apply to the remaining 50%.

The participations, shares or other rights must be held for a minimum period of five years (the “holding period”), unless they are transferred mortis causa, are liquidated in advance, become invalid, or are totally or partially lost as a result of a change affecting the management entity. 

The Spanish General Directorate of Taxes has clarified that that carried interest may be received in advance before the expiry of this five-year period without, in itself, resulting in a breach of this condition, including outside the expressly excepted cases, provided that the economic rights, shares or holdings continue to be held until the end of that period. 

The carried interest must also be conditional upon the other investors in the relevant entity obtaining a minimum return as defined in its regulations or articles of association. 

In addition, the special economic rights may not derive, directly or indirectly, from an entity resident in a tax haven.

The regime applies to the directors, managers or employees of certain entities who hold economic rights derived, directly or indirectly, from holdings, shares or other rights, including success fees, granting special economic rights in such entities, their management entities or entities in their group. 

The regime covers Spanish venture capital entities referred to in Article 3 of Law 22/2014 (Entidades de Capital Riesgo), European venture capital funds, European social entrepreneurship funds, European long-term investment funds, as well as other similar investment bodies. As regards foreign investment vehicles, binding ruling V2295-23 of the Spanish General Directorate of Taxes states that no generalisation can be made when determining which vehicles may be regarded as “similar”, and that this assessment must therefore be carried out on a case-by-case basis.

Yes. Carried interest is treated as employment income and, on that basis, is subject to the general social security regime.

No.