Global Tax Alert: Reform of the Spanish tax treatment of the carried interest

The bill to promote startups (Proyecto de Ley de fomento del ecosistema de las empresas emergentes) introduces significant changes in the tax treatment of the carried interest paid to the managers of private equity funds.

The bill considers that income from the carry shares realized by the managers qualifies as salary income subject to Personal Income Tax (and therefore taxed at a maximum progressive tax rate in the range of 45% to 54%) whereby however only 50% of the income will be subject to tax. If such income would have been treated as capital gain, it would be taxed at a maximum flat tax rate of 26%. In practice, the 50% reduction means that carried interest will be taxed at an effective maximum tax rate between 22.5% to 27%, meaning that the taxation of the carried interest has been brought in line with the taxation of the capital gains.

The 50% reduction only applies to carried interest from closed-ended Alternative Investment Funds (entities regulated under Act 22/2014, European venture capital funds, European social entrepreneurship funds and European long-term investment funds) and from other investment entities similar to these funds.

The application of the 50% reduction requires (i) the special rights of the carry shares are conditional upon the remaining investors obtaining a minimum guaranteed return as defined in the regulations or bylaws of the entity, (ii) the carry shares are maintained for at least five years and (iii) the special rights do not derive directly or indirectly from an entity resident in a country or territory classified as a non-cooperative jurisdiction or with which there are no regulations on mutual assistance for the exchange of tax information in place.

The bill to promote startups has been sent to the Congress for debate and approval. Final approval is expected by mid-2022.