Taxation of carried interest in Spain

The Spanish government has finally approved the Bill to promote start-ups in Spain, also known as the Start-up Law. As part of a package of measures designed to make Spain a more attractive place for entrepreneurs, the Bill includes for the first time, specific provisions regulating the tax treatment of carried interest at Spanish central state level.

Carried interest taxed as employment income

The Bill provides that income from carry shares realised by managers will be treated as employment income, subject to Spanish Personal Income Tax (at progressive rates, up to 45% to 54%). However, only 50% of this income will be subject to tax. The 50% reduction in the tax base means that carried interest will be taxed at an effective maximum tax rate between 22.5% to 27%, meaning that the taxation of carried interest is brought into line with the taxation of investment income and capital gains for individuals.

The Bill includes a number of conditions for the application of the 50% reduction of tax on carried interest income:

• The 50% reduction only applies to carried interest arising directly or indirectly from a) closed-end alternative investment funds as defined in Directive 2011/61/EU, including the following categories: i) entities regulated under article 3 of Act 22/2014; ii) European venture capital funds; iii) European social entrepreneurship funds; iv) European long-term investment funds; and b) investment entities similar to these funds.
• The recipient must be a director, manager or employee of those funds, or of their management company or companies in their group.
• The special rights of the carry shares must be conditional on the investors obtaining a minimum guaranteed return defined in the regulations or articles of the fund and (subject to certain exceptions, such as an early liquidation) they must be held for at least five years.
• These rights cannot derive directly or indirectly from a fund resident in a country or territory classified as a non-cooperative jurisdiction or with which there is no treaty on mutual assistance for the exchange of tax information in place.

Comment

The specific regime for the taxation of carried interest income is very welcome for venture capital and private equity firms in Spain as it provides a clear and attractive framework for the taxation of carried interest. It comes into force with effect from 1 January 2023.

It aligns with the rules in the Basque regions and Navarra and with the tax treatment of carried interest in a number of other European Union Member states. These measures should enable Spain to attract private equity and venture capital businesses.