Italy's carried interest regime

Carried interest schemes for financial professionals have gained considerable attention due to favourable tax regimes, and Italy's regime makes the country an attractive destination for private equity professionals, venture capitalists, and hedge fund managers due to its flat tax rate of 26%.

The carried interest regime offers a specific framework designed to encourage investment by providing an advantageous tax rate on this form of income, if certain conditions are met.

Under Italian tax law, carried interest held by fund managers can qualify either as employment income or financial income:

• employment income is subject to individuals’ income tax (IRPEF) at progressive rates (up to 43% plus local surcharges);
• financial income is subject to a flat 26% tax rate.

However, Italian tax law provides for a non-rebuttable legal presumption that carried interest automatically qualifies as financial income if all the following conditions are met:

• minimum managers’ commitment: the commitment of all managers and employees of the fund/company amounts to at least 1% of the overall investment or, if a company, of the net capital;
• hurdle rate condition: the carried interest is subordinated to the repayment to all the fund/company shareholders of their investments first, plus a preferred return s.c. “hurdle rate” (i.e. a minimum return set by the Articles of Association/By-laws);
• holding period condition: the securities/shares/other financial instruments embedding carried interest rights are held by the relevant managers and employees for at least five years.

If these conditions are met, carried interest is presumed to be financial income and is taxed at 26%.

The reduced tax rate makes the Italian regime particularly attractive compared to the higher tax rates applied in some other European countries and the U.S.

The carried interest regime allows for flexibility in how investment vehicles are structured, as long as they comply with the relevant legal framework. This includes both Italian-based and foreign-based private equity funds or investment vehicles.

The favourable tax treatment for carried interest is part of a broader effort to attract investment capital and top talent to Italy. By providing fund managers with competitive after-tax returns, Italy positions itself as an attractive destination for private equity firms looking to expand their European presence.

How we can help

Navigating the Italian legal system can be challenging without expert support. We have worked with a significant number of clients who have benefitted from Italy's special tax regimes. Our teams can support you through every stage, ensuring no detail is overlooked and that the process is efficient and successful.