It the news of the day: in the Italian Official Gazette published the end of April 2017, containing Decree n. 50/2017, a strong novelty has been provided for the private equity industry.
Article 60 of the said Decree regulates the taxation of the so-called “carried interest”, i.e. the performance remuneration paid to investment fund managers that, in addition to certain thresholds, is disinvesting.
Today, these additional incomes, which commonly correspond to a 15 to 20% share of capital gain, are considered by the Italian Tax Authority as incomes from labor, so they are taxed at a higher rate, namely 45%.
If the new Decree will be passed as it is, the carried interest will instead be treated as capital income and the rate would fall to 26%, aligning Italy with other EU countries and the United States.
This is a 19% tax decrease that aims to make Italy more attractive for private equity funds, in particular for such players leaving London after the Brexit.
Requirements needed to qualify the performance remuneration as a “carried interest” are:
- Total Investment for Employees and directors must result in an effective disbursement at least equal to 1% of (i) the net asset value (in case of companies or institutions) or (ii) the total investment subscribed (in case of collective investment funds).
- Remuneration of such investments are accrued only after that all shareholders or stakeholders in collective investment finds have (i) received an amount equal to their investments plus the so called “hurdle rate” or (ii) realized a compensation for the sale of their investments at least equal to their investments plus the so called “hurdle rate”, if a change of control occurs.
- The shares or such other financial instruments must be held by directors or employees at least (i) for 5 years from the investment date, or, if earlier, (ii) until a change of control occurs.
More information when the Decree will be enacted.