Global: Compare and contrast of tax treatment of carried interest in 7 jurisdictions

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In this client briefing we compare the carried interest taxation rules in 7 jurisdictions.

France

In France, there is a statutory carried interest regime that provides preferential tax treatment if certain conditions are met:

• at the time of subscription or acquisition of carried interest rights, the beneficiaries must be employed or hold executive positions in an eligible French or European fund;
• the fund vehicle’s main purpose must be the direct or indirect investment in shares or other securities giving access to the share capital of unlisted companies (a requirement that makes it difficult for credit funds to qualify for the preferential rate);
• the carried interest rights must be acquired at market value and must not replace salary, which means that beneficiaries who are employees must receive arm’s length compensation separate from their carried interest rights;
• the managers’ total aggregate co-investments must be equal to at least 1% of total aggregate commitments to funds with commitments up to €1 billion and at least 0.5% of total aggregate commitments exceeding €1 billion;
• carried interest shares must constitute a single category of shares; and
• managers cannot be paid carried interest for a period of at least five years starting from the date the fund was established or the date the carried interest shares were issued, depending on the nature of the fund.

If the conditions are met, carried interest proceeds are subject to a 30% flat tax, with an exceptional tax on high income earners of up to an additional 4% (ie an effective maximum tax rate of 34%). If the conditions of the regime are not met, however, returns received by individual carried interest holders are taxed as employment income, at an effective rate of up to 49% plus a special social contribution of 30% (ie an effective maximum tax rate of 79%).

Ireland

In Ireland, carried interest benefits from a favorable tax regime designed to incentivise investment and align the interests of fund managers with those of their investors. Carried interest is generally taxed as capital gains rather than ordinary income, resulting in a lower tax rate. Specifically, companies face a 12.5% capital gains tax rate, while individuals or partnerships are subject to a 15% capital gains tax rate. This preferential treatment is intended to encourage long-term investment and reward fund managers for their performance.

The regime applies exclusively to "qualifying venture capital funds" (QVC Funds), which must meet certain conditions:

• they must be structured as a partnership;
• they must be established for the purpose of making long-term (3+ years) investments in “Relevant Investments”, defined as unquoted shares and securities of private trading companies engaged in research and development activities or the development of new technological, telecommunication, scientific, or business processes; and
• the partners, including the general partner, must be legally obligated to provide capital sums for investment purposes over a period of time.

The regime only applies to the proportion of carried interest derived from Relevant Investments in EEA states (including Ireland) and the United Kingdom. Additionally, the carried interest must not exceed 20% of the total profits of the QVC Fund.

Italy

In Italy, there is a bespoke carried interest regime which provides a preferential tax treatment if certain conditions are met:

• the total aggregate co-investment by the managers must be at least 1% of the total aggregate commitments to the fund (albeit the Italian Tax Authorities have clarified that if this condition is not technically met, the preferential tax treatment may nevertheless still be available to a given carry recipient if their carried interest is sufficiently disconnected from any employment relationship);
• the managers are only paid carried interest after all investors in the fund (including managers in respect of their co-investment) have received an amount equal to their invested equity plus the hurdle rate; and
• at least five years has elapsed since the managers subscribed for carried interest rights before any carried interest is paid.

If the conditions are met, carried interest proceeds are treated as receipts of “financial income” and subject to tax at the rate of 26%. If the conditions of the regime are not met, however, returns received by individual carried interest holders may be taxed as employment income (depending on the specific circumstances), at an effective rate of up to circa 48% (including local surcharges).

Luxembourg

In Luxembourg, an entitlement to carried interest may be structured as a separate class of shares within a non-tax transparent Luxembourg investment fund (such as a RAIF, a SICAR or a SIF).  Carried interest shareholders may benefit from the following tax treatment: 

• Equity distributions made by a non-tax transparent Luxembourg investment fund to the carried interest shareholder are free of Luxembourg withholding tax, irrespective of the tax residence of the carried interest shareholder.
• For carried interest shareholders who are resident outside Luxembourg:
  • Income from equity distributions or capital gains realised upon disposal of the carried interest shares in the non-transparent Luxembourg investment fund are not taxable in Luxembourg (but will be taxable where the carried interest shareholder is tax resident, in accordance with local tax rules).
• For carried interest shareholders who are resident in Luxembourg:
  • Capital gains realised on carried interest shares 6 months or more after they were acquired or subscribed for are taxed at:
    • 0% if such carried interest represents less than a 10% participation in the share capital of the Luxembourg investment fund;
    • Up to 22.89% (instead of up to 45.78%) if such carried interest represents a participation of 10% or more in the share capital of the Luxembourg investment fund.
  • Capital gains realised on carried interest shares held for less than 6 months are taxable at 45.78%
  • Income from share dividends (and other equity distributions) is taxed in accordance with the ordinarily applicable income tax rules. A 50% exemption may be available if the non-Luxembourg investment fund is a fully taxable Luxembourg company (eg SICAR or RAIF-SICAR) and does not benefit from a subjective exemption (eg SIF or RAIF-SIF).

It is best practice for carried interest shareholders to formally subscribe for carried interest shares instead of being issued carried interest shares as part of their remuneration.

Spain

In Spain, there is a (relatively new) carried interest regime which provides a preferential tax treatment if certain conditions are met:

• managers are only paid carried interest after all investors in the fund (including managers in respect of their co-investment) have received an amount equal to their invested equity plus the hurdle rate; and
• at least five years has elapsed since the managers subscribed for or otherwise acquired the carried interest rights before any the carried interest must not be paid out for a period of at least five years after the carried interest is paid.

The carried interest regime only applies to certain specified types of fund. It does not apply to real estate or credit funds. The carried interest regime is specifically disapplied with respect to carried interest from investment vehicles located in what are considered to be ‘non-cooperative jurisdictions’ or jurisdictions with which no rules have been established on mutual assistance for the exchange of tax-related information (eg Jersey, Guernsey and Cayman Islands). 

While all carried interest is taxed as employment income, if the conditions of the regime are met, then a 50% partial exemption applies limiting the maximum effective rate of tax to 27% on carried interest receipts. If the conditions of the regime are not met, however, then returns received by individual carried interest holders may be taxed at an effective rate of up to 54%.

United Kingdom

Under the current UK tax rules, as a general base case and assuming the carried interest recipient is an additional rate UK taxpayer, carried interest comprising capital gains will be taxed in their hands at a special rate of capital gains tax (CGT) of 28% and carried interest comprising dividends or interest income (or other returns of a revenue nature) will generally be subject to tax in their hands at an ultimate effective rate equal to their applicable relevant marginal income tax rate (currently 39.35% for dividend income and 45% for other income).

Following a change in government and a month-long ‘Call for Evidence’ by HM Treasury (HMT), it was announced at the UK Autumn 2024 Budget that in respect of carried interest arising on or after 6 April 2025, the special carried interest CGT rate of 28% will be increased to 32%.

From 6 April 2026, however, all carried interest (whether of a capital or revenue nature) will be treated as profits of a deemed trade and fall within a revised tax regime wholly within the UK’s income tax framework. Accordingly, at current rates, an additional rate taxpayer’s carried interest receipts will, as a base case, be taxed at an effective rate of circa 47% (income tax plus Class 4 national insurance contributions).

Carried interest that meets certain conditions will, however, be considered “qualifying” carried interest, which will benefit from preferential computational rules. Assuming the recipient is an additional rate taxpayer, the practical effect of the new rules is that their qualifying carried interest will be taxed at an effective rate of around 34.1% (including Class 4 national insurance contributions). Given the speculation that a much higher effective rate would be proposed for all carried interest, this effective rate for qualifying carried interest will be seen by some as a win. It is broadly in line with the rate applied in France, but somewhat higher than the rates levied in Italy, Spain and Germany.

While the proposed simplification inherent in a single, exclusive regime and charge to tax on carried interest is to be welcomed, the fundamental shift in the manner in which the UK taxes carried interest has the potential to give rise to a host of practical challenges that will need to be dealt with. In particular, the wholesale switch to the income tax regime (alongside reform of the non-domicile regime and inheritance tax) will bring with it additional considerations, if not challenges, for certain ‘internationally mobile’ executives. Under the new regime, non-UK tax resident executives will be within the charge to UK income tax in respect of carried interest relating to services performed in the UK (subject to any available relief under an applicable double tax treaty).

It will be critical for the government to work closely with investment management stakeholders to ensure that the new regime is fair and workable in practice, to help maintain the UK’s attractiveness to the private capital and investment management sectors.

In this context we note that HMT ran a public consultation between 30 October 2024 and 31 January 2025 on introducing additional conditions to accessing the qualifying carried interest regime, the options explored being:

• an aggregate minimum co-investment requirement; and
• (of particular focus) a minimum holding period between a carried interest award and its receipt.

Unsurprisingly, many in the industry will be disappointed with the government’s proposals and HMT can expect significant push back to both of these mooted additional conditions given the practical difficulties entailed with balancing fairness, competitiveness and technical and practical workability. If any such additional conditions are ultimately introduced, the government may need to do so alongside the adoption of appropriate grandfathering and transitional provisions.

It will be some time before the full extent of the changes and their practical impact will be known and felt. Whether alternatives to a traditional carried interest arrangement will be viable (if not preferable) will be something that certain managers will no doubt start to explore, more so if the new regime does not strike the right practical balance.

“Sponsor executives may seek to renegotiate compensation packages, which could include higher salaries and bonuses if their after-tax earnings are reduced as a result of the proposed changes to the taxation of carried interest. Such alternative incentives could provide more certainty to individuals, despite being taxed as employment income rather than capital gains.  This shift toward salary and bonus incentivisation – including concepts such as phantom carry – may be attractive among junior levels, especially where their carry allocation may not be meaningful enough.”

Richard Surtees

Partner, UK

“The fundamental shift in the approach to the taxation of carried interest in the UK gives rise to a whole host of practical and legislative concerns and challenges to contend with, both for sponsors and government. To ensure that the new regime is fair and workable in practice, it will be critical for government to design the detail of the new regime in a manner which adequately reflects the informed representations of sponsors and other key stakeholders.”

Ben Shem-Tov

Principal Associate, UK

United States

In the United States, carried interest, a common incentive structure for private fund managers, benefits from a tax treatment that generally aligns with investment income rather than ordinary compensation. Under current law, the top federal ordinary income tax rate is 37%, while long-term capital gains are taxed at a reduced rate of 20%, provided the investment is held for more than a year. 

However, following the 2017 Tax Cuts and Jobs Act (TCJA), carried interest gains are only eligible for the preferential long-term capital gains rate if the underlying asset or fund interest is held for at least three years. If held for three years or less, these gains are reclassified and taxed at ordinary income rates. While this provision sought to address concerns about the preferential tax treatment of carried interest, its impact has been limited, as most private funds hold assets for more than three years.

Critics argue that carried interest represents compensation for fund management services and should be taxed as ordinary income. Proponents contend it is entrepreneurial income and deserves the same favorable treatment as other long-term investments. 

The prior Trump administration, while imposing the three-year rule, avoided further reforms to carried interest taxation. Republican proposals have included reducing the top capital gains rate to 15% and eliminating the Net Investment Income Tax (NIIT), potentially lowering the effective rate by 3.8%. Recently, the Trump administration has asserted it plans to abolish the favorable carried interest tax treatment altogether, treating carried interest amounts as ordinary income. Accordingly, with the new Trump administration, and given the political variability, fund managers and investors should remain vigilant in assessing potential changes and planning opportunities.

How Eversheds Sutherland can help

In the area of investment funds, Eversheds Sutherland is dedicated to a comprehensive advisory approach, integrating investment law, regulatory law, and tax law at both domestic and international levels. Our experienced teams in all relevant jurisdictions combine local legal and tax knowledge to support your investments or investment funds.

We provide advice to investors on investments in domestic and foreign investment funds, sponsors on the structuring, launch, and distribution of domestic and foreign investment funds, and on the acquisition and disposal of investments both domestically and internationally. Additionally, we represent investment and asset management clients in litigation and extra-judicial proceedings in the fields of regulatory and tax law.

With thanks to Thomas Pritchard for co-writing this briefing.