Carried interest: subsidised financing is not an obstacle

by Andrea Petracca, Chiara Vetulli

In its reply to Tax ruling request no. 403 of 2023, the Italian Revenue Agency provided some clarifications on carried interest, when Managers subscribe to financial instruments with privileged rights by partially benefiting from a subsidised loan granted by the issuing company.

The issue

The applicant, Beta Holding S.p.A. (Beta), holds 100 per cent of the share capital of Alfa S.p.A. (Alfa) and has approved a co-investment plan involving the subscription by Alfa's Managers of financial instruments with improved property rights issued by Beta.

To subscribe these financial instruments, some Managers will benefit from a subsidised loan from the Company at an interest rate of 1.25% per annum.

The actual amount invested by the Managers for the initial subscription of the financial instruments is approximately 0.64% of the current value of Beta's assets.

Article 60 of Italian Decree-Law No. 50 of 2017 provides that financial instruments with enhanced property rights automatically benefit from the capital gains tax rate (26%) instead of the employment tax rate, if three conditions are met:

  • The Managers' investment is at least 1% of the fund's investment or the company's net assets;
  • Carried interest is distributed to Managers only after all investors in the fund have received an amount equal to their equity investment plus a hurdle rate;
  • The Managers maintain their investment for at least five years.

If one of the above conditions is not satisfied, it is still possible to file a ruling request to the Italian Tax Authorities to demonstrate the financial nature of the carried interest, in order to apply the capital gains tax rate. 

In this case, the minimum investment requirement is not met and Beta asks which tax regime applies to the income from these financial instruments.

Revenue Agency Solution

The Italian Revenue Agency considers that, in the present case, there are several indicators that the Managers’ investment risk is aligned with other investor’s investment risk:

  • The investment is not sufficient to reach the 1% threshold, but is considered to be significant (2.900.000 euros);
  • The subsidised loan is considered a fringe benefit;
  • The Managers are required to repay the loan and there are no arrangements that exclude their investment risk;
  • The Managers have an adequate remuneration, so that the income from these financial instruments cannot be considered as a part of their remuneration.

For the above reasons, the Italian Revenue Agency considers the income from the Managers’ investment as capital gains income.