This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.

Freshfields Transactions

| 4 minutes read

New tax ruling brings positive news for the taxation of carried interest in Spain

Since our previous post Spanish taxation of carried interest: what’s new for the private equity sector?, the Spanish General Tax Directorate has published its first tax ruling clarifying some of the issues that provoked discussion after the approval of the Law promoting the start-up ecosystem (known as the Start-Up Law), which set out a new tax regime applicable to carried interest with effect as from 1 January 2023. 

In essence, the Start-Up Law has set out that carried interest income should be treated as employment income for Spanish tax purposes, subject to a 50% reduction that will apply if certain requirements are met. Considering that Madrid’s highest marginal employment income tax rate is currently 45%, the effective tax rate of a private equity executive would be around 22.5% if these conditions are satisfied.

In this blog, we examine the content of this landmark ruling for private equity houses and executives operating in Spain.

Application of the new carried interest regime to non-Spanish private equity entities

One of the Start-Up Law’s requirements in order to qualify for the 50% reduction is that carried interest income must derive, directly or indirectly, from either (i) certain closed-ended AIFs as defined in Directive 2011/61/CE (including Spanish private equity entities -fondos de capital riesgo or sociedades de capital riesgo-); or (ii) other entities “analogous” to those included in this list of closed-ended AIFs.

However, the Start-Up Law does not provide any guidance on what comparability criteria should be used to determine whether an international private equity fund should be deemed “analogous”.

In this regard, the ruling indicates that the analysis of whether a private equity entity can be deemed “analogous” to a Spanish private equity entity needs to be carried out “case-by-case”. However, the ruling does expressly state that the new carried interest regime should be applicable to those non-Spanish entities that meet the requirements set out in Article 14.2 of Law 22/2014, of 12 November, regulating Spanish private equity entities.

Article 14.2 requires that for a non-Spanish entity to qualify as comparable to a Spanish private equity entity it is required that:

(i) the entity itself or its management company is established in the European Union or in a jurisdiction that is not classed as a non-cooperative jurisdiction and that has entered into an exchange of information treaty with Spain, or a double tax convention with an exchange of information provision; and

(ii) irrespective of its nature or statute, in accordance with applicable legislation, the activity carried out by that entity is similar to that of Spanish private equity entities (broadly, investment into non-listed companies that are not passive real estate companies or financial companies).

Application of the new carried interest regime to bonuses in lieu of carried interest

The ruling confirms that the new regime should also be applicable where carried interest of the fund is not allocated directly to the managers/employees but instead held by some other company within the group (e.g. the employer company or the management company) which then enters into a “bonus in lieu of carried interest”-type arrangement where the bonus is payable if the company itself receives carried interest distributions/payments.

Carried interest payments within the first five years from allocation of carried interest entitlement/shares/interest

One of the requirements set out by the Start-Up Law for the 50% reduction to be available is that the shares or rights entitling the individual to carried interest distributions must be held continuously during at least a 5-year period.

The ruling confirms that this requirement should be interpreted so that the new regime will apply to carried interest received by employees even if such amount is paid during the first 5 years from allocation of the relevant carried interest right/share to the employee/manager.

Hence, unlike other European tax regimes (such as the French carried interest arrangement, also known as the Arthuis regime), the new Spanish carried interest regime does not set out a “lock-up” period on distributions, but rather enables the manager to benefit from the regime from day one and then requires them to hold on to the relevant share/right for a period of at least five years.

The ruling goes on to stipulate that if the five-year holding period is not completed after the special regime has been applied to carried interest income received during the preceding years, the taxpayer has an obligation to rectify its tax position and reimburse the Spanish tax authorities with an amount equal to the reduction of tax liability obtained via application of the new carried interest regime.

Withholding taxes

The ruling clarifies a point that was unclear from a combined literal reading of the new regime and the existing Personal Income Tax regulations: it confirms that withholding taxes applied by the employer must be calculated by reference to carried interest employment income received by the employee after applying the 50% reduction set out in the new regime. Furthermore, it confirms that the withholding tax rates applicable will be those deriving from application of the withholding Personal Income Tax rules in the case of regular employees and 35% for directors of companies.


Whilst questions remain regarding how this new carried interest regime is going to be interpreted by the Spanish tax authorities and courts, the publication of this tax ruling helps to clarify some of the most relevant questions raised by the private equity industry upon approval of the Start-Up Law.

If you would like to discuss this development with us, please contact our Tax team or your usual Freshfields contact.


tax, private equity