Carried interest - Latest trends of the Italian Tax Authority

This contribution, following our previous publications for a general examination of the discipline (here), as well as for the previous guidelines of the Financial Administration on the subject (here), is intend to comment on the very recent interpellation responses published by the Revenue Agency on carried interest.

Preliminarily, we would remind that Article 60 of Legislative Decree n. 50/2017 establishes some objective conditions which, if verified, allow the automatic qualification of carried interest as financial income. Where, however, these conditions are not verified, the Revenue Agency has specified with Circular no. 25 / E / 2017 that it will be necessary to carry out a case-by-case verification aimed at ascertaining whether the carried interest, even if it does not meet the requirements of the aforementioned article 60, can still qualify as financial income or is attracted to the sphere of employment income.

In this context, the interpellation responses in question here provide clarifications both on the elements to be taken into consideration in the context of case-by-case checks and on the correct interpretation of the requirements set out in Article 60.

In particular, the response to question n. 407/2020, in the context of the factual verification, attributes relevance, in a negative sense, to the fact that the overall investment made by the recipients of the carried interest would have covered only 0.15% of the total investment. Even if the applicant wanted to support the significance of the investment in terms of absolute value, this was not considered sufficient by the tax authority to be able to consider the investment of managers as aligned with those realized by other investors in terms of assumption and sharing of risks and interests.

Another circumstance considered therein not capable of qualifying carried interest as financial income was that of having previously eliminated the variable remuneration policies of managers in favor of an increase in the limit of the maximum carried interest attributable to them. In particular, the allowed carried interest / GAI ratio was raised from 1: 1 to 2: 1. This change was interpreted by the Revenue Agency as a clear signal that the carried interest was in fact integrated with a part of the remuneration rather than constituting financial income deriving from the investment.

The subsequent response to question n. 435/2020, which instead ends with a favorable outcome for the instant, identifies the following points as key elements for the financial qualification of carried interest:

1. compliance with the leavership clauses agreed therein, on the basis of which the leavers would have continued to be part of the company and to have the right to ordinary and carried income, with the exception of bad leavership cases in which - without prejudice to the return of quotas already paid until the leavership event - the exposure to the actual risk of loss of the invested capital remained in any case until the end of the term of the fund; is
2. the fact that the right to receive the carried interest was equally attributed also to subjects not linked to the company by employment or administration relationships, thus leading to the exclusion of a connection between holding shares and working performance as well as guaranteeing the alignment of interests and risks between managers and other investors.

Finally, the response to question n. 436/2020, clarifies a crucial aspect relating to the determination of the 1% threshold established by letter a) of article 60 (so-called minimum investment requirement). More precisely, the applicant supported the thesis according to which in the presence of investments staggered over time, the 1% threshold can be verified having regard to the current value of the initial investment (to be determined with the aid of an appraisal drawn up by a professional). The Revenue Agency, on the contrary, sticked with the wording of the law and stated that 1% must necessarily be verified in terms of actual monetary outlay. It therefore concludes by stating that in the event of a monetary outlay of less than 1% of the current value of the net equity, it will be necessary to integrate the investment in order to satisfy the minimum investment requirement even if, by revaluing the initial investment at current values, the 1% threshold could be considered exceeded.