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Carried interest: when the manager’s return is investment income

Shares and quotas carrying enhanced economic rights (diritti patrimoniali rafforzati) allotted to directors and employees generate a return which art. 60 of d.l. 50/2017 classifies ex lege as reddito di capitale (investment income) or reddito diverso (other income, covering capital gains and similar items) where the conditions set out in the provision are met. From 1 January 2027 the provision ceases to apply and is carried over, in substantially identical terms, into art. 212 of the new testo unico delle imposte sui redditi (consolidated income tax act).

Where a director or an employee is allotted shares or quotas (the participation units of an Italian limited liability company) carrying enhanced economic rights — so-called carried interest — the resulting return is investment income or other income, irrespective of any connection with the work performed, provided the three conditions set out in art. 60, paragraph 1, of decreto-legge 24 aprile 2017, n. 50, converted with amendments by legge 21 giugno 2017, n. 96, are met. They are: an actual cash outlay of at least 1 per cent of the aggregate investment or, in the case of companies or entities, of net equity; deferred vesting of the excess return; a holding period of at least five years. What changes is the income category: income of a financial nature is subject to the 26 per cent rate set by art. 3 of d.l. 66/2014 for withholding taxes and substitute taxes, converted by legge 89/2014. If classified as income from work, the same amount forms part of taxable income for the purposes of IRPEF (the Italian personal income tax), subject to progressive rates, and may be relevant for social security purposes under the rules governing the relationship in question.

A statutory presumption, not a relief

Art. 60 provides that returns arising from direct or indirect participation in companies, entities or collective investment undertakings (organismi di investimento collettivo del risparmio, OICR), received by employees and directors of those entities or of entities linked to them by a direct or indirect relationship of control or management, “are in any event treated as investment income or other income” where they relate to shares, quotas or other financial instruments carrying enhanced economic rights. In circular no. 25/E of 16 October 2017 the Italian Revenue Agency (Agenzia delle entrate) treats the rule as a statutory presumption operating in one direction only: where the requirements are met, the financial nature of the return is independent of any connection with the work performed. Even so-called good leaver and bad leaver clauses, which reserve to the company a right of redemption on termination of the relationship, are immaterial. It is therefore neither an elective regime nor a relief that must be claimed: it is a classification rule which either applies or does not apply, on the basis of the facts and the documentation.

First condition: 1 per cent, with an actual cash outlay

The aggregate investment commitment of all the directors and employees concerned — in practice, the managers — must involve “an actual cash outlay of at least 1 per cent of the aggregate investment made by the collective investment undertaking or of net equity in the case of companies or entities”. In companies the threshold is measured against actual net equity at current values, which — as circular no. 25/E specifies — may be determined on the basis of valuation reports prepared for the purpose, taking the managers’ own investment into account as well. The numerator of the ratio includes the instruments without enhanced rights subscribed by the same persons (paragraph 3) and the amounts already taxed, as a benefit in kind, as employment income, income assimilated to employment income, or self-employment income at the time of the grant or of the subscription and, for non-resident persons, the amount that would have been taxed had they been resident in Italy (paragraph 2). It does not include, on the other hand, the enhanced instruments subscribed by shareholders or sponsors other than the managers, whose contribution remains in the denominator, that is, in the net equity against which the threshold is measured. The threshold must, moreover, be maintained over time: if the admission of new investors increases net equity, the managers must adjust their own investment by the end of the financial year in which that admission took place.

Second condition: the excess return vests last

The returns on the enhanced instruments must vest only after all shareholders or unitholders have received an amount equal to the capital invested and to a minimum return provided for in the articles of association or in the fund rules (hurdle rate); in the event of a change of control, vesting is conditional upon the other shareholders having obtained on the disposal a price at least equal to the capital invested and to that minimum return. The circular clarifies a point that in practice gives rise to errors: the deferral concerns only the excess return, that is, the enhanced component. Before that component vests, the holders of the enhanced instruments are treated in the same way as the other investors and may receive the return of capital and the ordinary returns.

Third condition: a five-year holding period

The instruments must be held for a period of not less than five years or, if earlier, until the date of the change of control or of the replacement of the appointed manager of the vehicle; on the death of the holder, the holding by the heirs is also taken into account. The period runs from the date of each individual subscription and the constraint extends to the instruments without enhanced rights that count towards the 1 per cent: their disposal within the five-year period may cause the ex lege classification to fall away. A person taking over from an outgoing manager may not count the predecessor’s holding period towards his own. An early disposal that does not occur in connection with a change of control or with the replacement of the appointed manager of the vehicle, the circular warns, prevents the statutory presumption from operating. The five-year period does not, however, prevent the return from being received earlier. The amounts may be paid out and treated as investment income, subject to review of the classification and paying the additional tax, where due, if the instruments are subsequently disposed of before the end of the period otherwise than in the permitted cases.

A preliminary check: where the company or fund is established

The three conditions do not exhaust the provision. Paragraph 4 of art. 60 restricts the application of the rules to returns arising from participation in “collective investment undertakings, companies or entities resident or established in the territory of the State and to those resident and established in States or territories which allow an adequate exchange of information”. This is a check worth carrying out before any calculation of the 1 per cent: if the company, the entity or the undertaking is foreign and does not meet that requirement, the presumption does not operate at all. Paragraph 5 then limits the rules to returns received from 24 April 2017 onwards; the reference to receipt, the circular observes, brings the cash basis into play and therefore also captures returns relating to units subscribed before that date but distributed afterwards; for those units, the five-year period continues to run from the original subscription.

Where a requirement is not met

The absence of one of the conditions does not entail the automatic reclassification of the return as income from work. Circular no. 25/E, citing the explanatory report, indicates that in that case the returns “must be classified as income from work (employment income, assimilated income or self-employment income) or as income of a financial nature, depending on the circumstances”: a case-by-case analysis, conducted by reference to indicators, is required. Pointing towards a financial nature are: the manager’s genuine exposure to the risk of losing the capital invested; the possibility for the manager to retain the instruments even after termination of the employment relationship (a circumstance which, in the circular’s view, tends to exclude a close connection with the work performed); the holding of instruments with the same features by other shareholders. Pointing in the opposite direction are: clauses which in any event guarantee the full return of capital; good leaver and bad leaver clauses, which link the return to the work actually performed; ordinary remuneration set appreciably below market levels. Here, therefore, those same arrangements which are immaterial where the requirements are met become an indicator against a financial nature. The Revenue Agency has returned to these indicators on several occasions in replies to ruling requests issued after the circular, and for those seeking advance certainty the route of a ruling request (interpello), which the circular expressly mentions, remains available.

What changes from 1 January 2027

Art. 60 of d.l. 50/2017 is repealed by art. 376, paragraph 1, letter hhhhh), of d.lgs. 19 giugno 2026, n. 117 — the testo unico delle disposizioni legislative in materia di imposte sui redditi (consolidated income tax act), published in ordinary supplement no. 26/L to Gazzetta Ufficiale no. 152 of 3 July 2026 — with effect from the date indicated by art. 377, that is, from 1 January 2027. The consolidated act has been in force since 4 July 2026, but its provisions apply only from that date. The rules do not disappear: they are reproduced, in substantially identical terms across the five paragraphs — with only the adjustment of internal cross-references and a few spelling variants — in art. 212 of the consolidated act, whose heading states that it derives from art. 60. It nonetheless remains prudent to read the new text rather than assume it to be identical. Art. 376, paragraph 2, adds that references in other provisions to the repealed provisions are to be understood as made to the corresponding provisions of the consolidated act. Until 31 December 2026 the applicable provision remains art. 60: legal databases presenting it as “repealed” refer to a deferred, not a current, repeal, and this is a misunderstanding to be avoided when drafting an opinion. Since the minimum holding period is five years, plans currently in place will straddle the two sets of rules. Updating the statutory references in articles of association, fund rules and resolutions is advisable for clarity, but not necessary for validity, because art. 376, paragraph 2, itself converts the cross-references; what is essential, instead, is to retain the entire body of documentation by which compliance with the conditions satisfied before that date will be demonstrated after 1 January 2027.

In practice

Those allotting instruments with enhanced economic rights should proceed in the following order. First: verify that the company, the entity or the undertaking is resident or established in Italy or in a State which allows an adequate exchange of information (paragraph 4). Second: obtain a valuation report of actual net equity at current values, dated before the subscription, so as to fix the 1 per cent base in a defensible manner. Third: document each subscriber’s actual cash outlay by means of the capital increase resolution and the bank records evidencing the payments. Fourth: set out in the articles of association or in the fund rules the clause deferring the excess return, with an express statement of the minimum return, and regulate the change of control and the replacement of the appointed manager of the vehicle. The shareholders’ agreement, which is effective only between the parties who sign it, may supplement those provisions, but not replace them. Fifth: observe the five-year period for the ordinary instruments that count towards the threshold as well, and check that the 1 per cent threshold is still met on each capital increase or admission of new shareholders, adjusting the investment by the end of the financial year; if the vehicle is foreign, also consider the tax monitoring obligations (the annual reporting of foreign assets in the tax return) and the choice between the declaratory regime (the taxpayer reports the gains and pays the tax in the annual return) and the administered regime (an Italian intermediary applies the substitute tax on each transaction). Sixth: retain evidence of the distribution order (waterfall) actually applied and the distribution statements, because it is against those documents that the consistency between what was agreed and what was paid is tested in the course of a tax audit. A separate matter, not addressed here, is the adequacy of the subscription price relative to the value of the instruments at the time of the grant, which belongs to the income-from-work side of the analysis. On documentary safeguards in dealings between shareholders and the company, we refer to our article on shareholder loans and the presumption of revenue; on what becomes of the participation after the company has been wound up, to the one on the struck-off company and the standing of its shareholders.

Frequently asked questions

Does the rule apply only to funds, or also to operating companies?

It applies to companies as well. Art. 60 refers to companies, entities or collective investment undertakings, and circular no. 25/E devotes a dedicated section to investments in corporate participations, specifying that in that case the 1 per cent is measured against actual net equity at current values. This is the typical structure of management participation plans in acquisition transactions and in family business reorganisations, in which the manager or the incoming shareholder is granted a position with differentiated rights: shares of a class carrying different rights (art. 2348, paragraph 2, of the Italian Civil Code), possibly linked to the results of a specified business sector, so-called tracking shares (art. 2350, paragraph 2); participating financial instruments (art. 2346, paragraph 6); or, in the s.r.l. (the Italian private limited liability company), special rights attributed to the individual shareholder (art. 2468, paragraph 3).

May the manager receive payment before the five years have elapsed?

Yes. Circular no. 25/E accepts that the minimum holding period may also be completed after the return has been paid out: amounts distributed before the end of the five-year period may be treated as investment income, including for the purposes of the withholding agent’s obligations. If, however, the instruments are disposed of before the end of the period, otherwise than in the cases of a change of control or of replacement of the appointed manager of the vehicle, the presumption falls away and the classification must be reviewed under the general principles, applying the same indicator-based analysis described above; if the return proves on that review to be income from work, the additional tax must be paid and the position may be regularised through the voluntary correction (ravvedimento operoso) provided for by art. 13 of d.lgs. 472/1997.

If one of the conditions is not met, is the return automatically income from work?

No. What falls away is the statutory presumption, not the possibility that the return is financial in nature: the classification must be established case by case, by reference to indicators, considering first of all whether the manager is genuinely exposed to the risk of losing the capital invested. It is precisely here that the soundness of the contractual and accounting documentation reduces the risk of a challenge by the tax authorities.

• D.L. 24 aprile 2017, n. 50 (Gazzetta Ufficiale no. 95 of 24 April 2017, ordinary supplement no. 20), converted with amendments by legge 21 giugno 2017, n. 96 — art. 60, paragraphs 1 to 5: returns on participations in companies, entities or OICR held by employees and directors.
• Italian Revenue Agency (Agenzia delle entrate), circolare n. 25/E of 16 October 2017 — scope of application, minimum investment, deferral of the excess return, minimum holding period, classification where the requirements are not met, commencement.
• D.Lgs. 19 giugno 2026, n. 117 (ordinary supplement no. 26/L to Gazzetta Ufficiale no. 152 of 3 July 2026) — art. 212 (text corresponding to art. 60 of d.l. 50/2017), art. 376, paragraph 1, letter hhhhh), and paragraph 2 (repeals and cross-references), art. 377 (application from 1 January 2027).
• D.L. 24 aprile 2014, n. 66, art. 3, converted by legge 23 giugno 2014, n. 89 — increase of the rates of withholding tax and substitute tax on income of a financial nature to 26 per cent.
• D.P.R. 22 dicembre 1986, n. 917 (TUIR), artt. 44, paragraph 1, letters e) and g); 50, paragraph 1, letter c-bis); 51; 52; 53; 67, paragraph 1, letters c) and c-bis); 68 — investment income; other income of a financial nature; employment income and income assimilated to it; self-employment income.
• Italian Civil Code, artt. 2346, paragraph 6; 2348, paragraph 2; 2350, paragraph 2; 2468, paragraph 3; 2341-bis — participating financial instruments, classes of shares, tracking shares, special rights of the s.r.l. shareholder, shareholders’ agreements.
• D.Lgs. 18 dicembre 1997, n. 472, art. 13 — voluntary correction (ravvedimento operoso).