Spanish tax regime for private equity carried interest in IRPF

Taxation of carried interest

The Law on the promotion of the start-up ecosystem, among many other issues, regulated the taxation in the Personal Income Tax (IRPF) of the carried interest (called by the rule "special economic rights") typical of the private equity sector, applicable to managers of Alternative Investment Funds (with the exception of closed collective investment entities), on the basis of two fundamental elements:

i. The classification of the carried interest as work income for personal income tax purposes. 

ii. The establishment of a reduction in the personal income tax base of 50% applicable without any quantitative limitation to the carried interest obtained in certain circumstances ―fundamentally, the existence of a minimum return for investors and the maintenance of the rights to the carried interest for a period of 5 years. 

The text finally approved did nothing more than establish, for tax periods beginning on and after January 1, 2023, an incentive for the development of the sector comparable to that which exists in the countries around us, in order to promote venture capital as an undisputed engine of entrepreneurship, innovation and economic activity in Spanish territory. At the same time, with this rule, the uncertainty that reigned until then in terms of the taxation of this income was eliminated.

This does not mean that the final text, which was refined throughout its processing in Parliament and which, subsequently, was interpreted (correctly, in our opinion) in some of its aspects by the Directorate General of Taxes by means of several binding consultations, still generates certain doubts about specific aspects of some of its requirements (for example, the concept of manager, the definition of group, etc.). These are issues that, for the most part, SpainCap, as a representative of the sector, and with the help of certain firms such as AG, is already trying to resolve in direct dialogue with the Directorate General of Taxes.

The approval of this regime was, without a doubt, great news for the development of Spain's economy and competitiveness, and constituted an important recognition for a sector whose commitment to growth and development has remained unwavering over decades.

There are multiple aspects that must be analysed for a correct application of this very important tax benefit. The decades of dedication to the private equity sector by the Tax Department of Addleshaw Goddard Madrid place us in an unbeatable position to advise our clients on the optimal compliance with the legal requirements that allow them to access these savings in their Personal Income Tax.