New developments concerning carried interest

On November 3, 2022, in a plenary session, the Spanish Congress of Deputies (lower house of parliament) approved the Bill to Promote the Start-up Ecosystem (the “Bill”) and referred it to the Spanish Senate (upper house), so the latter can continue with the parliamentary processing of the Bill, due to finish on November 28 at the latest. We expect the final approval and publication in the Official Gazette of the Spanish State before the end of 2022. The Bill includes, with effect from January 1, 2023, the tax treatment of carried interest (additional remuneration paid to managers of private equity and venture capital funds if they are successful in their management). Thus, and as we mentioned in our Legal Flash | New developments for funds, entrepreneurs and impatriates, the regulation will be aligned with the regulations in neighboring countries and in the chartered communities of the Basque Country and Navarre.

During the processing at the Congress of Deputies, the wording of this tax treatment of carried interest underwent changes; particularly, regarding the types of funds to which this tax treatment of carried interest applies and the cases in which it applies (the rest is basically the same as the analysis discussed in our Legal Flash | New developments for funds, entrepreneurs and impatriates).

If this regulation is approved in its current wording, this form of remuneration will qualify as income from work and 50% of that income will be subject to personal income tax. This treatment will apply to income obtained directly or indirectly (the inclusion of income obtained indirectly was decided on during the parliamentary processing; in this document, we will highlight the new developments in bold) from shares and other rights, including success fees (a clarification also included during the processing at the Congress), that grant special economic rights in certain entities, provided the following requirements are met:

• Entities granting special rights: the list of entities has been amended under the Bill. The special rights are granted by: a) Closed-ended Alternative Investment Funds as defined in Directive 2011/61/EU included in some of the following categories: i) entities defined in article 3 of Act 22/2014, regulating venture capital funds and other closed-ended investment funds, ii) European venture capital funds, iii) European social entrepreneurship funds, iv) European long-term investment funds; and b) investment entities similar to these funds. This amendment is relevant in that it exclusively refers to venture capital funds regulated by Spanish Act 22/2014 (those mentioned in article 3), therefore leaving out of its scope of application other instruments such as closed-ended type collective investment schemes. In turn, this creates an element of insecurity for non-Spanish entities to which this regulation could be applied, as it would be necessary to carry out a comparability analysis with Spanish venture capital funds.

• Recipient: the recipient must be a director, manager or employee of those entities, or of their management companies or companies of their group.

• The special economic rights from shares or other rights, including success fees, must be made conditional on the investors obtaining a minimum guaranteed return defined in the regulations or bylaws of the entity, and they must be maintained for at least five years, with some exceptions, such as an anticipated liquidation. Also, during the processing at the Congress, the concept of mortis causa transfer of these rights has been excluded from the maintenance requirement.

• Moreover, these rights cannot derive directly or indirectly from an entity resident in another country or territory classified as a non-cooperative jurisdiction or with which no rules have been established on mutual assistance for the exchange of tax-related information.

To summarize, the Bill is still in processing, some changes have been made that restrict its scope of application and more changes are likely to come during its processing at the Senate, which is starting now and is due to end on November 28, 2022.

In addition to these amendments, the Congress also approved other tax changes in the Bill, such as those discussed in the Post | Proposals to improve Spanish impatriate tax regime.