Carried Interest and the Risk of Reclassification as Employment Income

The Italian Revenue Agency's recent response to ruling request no. 95/2025 highlights a concerning tightening of administrative practice concerning carried interest, with significant implications for managers and investors.

In the case examined, the Agency reclassified income derived from shares with enhanced economic rights as employment income. This decision was made despite the presence of typical elements of a financial investment, such as an outlay of 1.48% of the net equity and exposure to the risk of loss.

A critical element in the decision appears to be the failure to meet the requirements for the legal presumption of a financial instrument under Article 60 of Law Decree no. 50/2017. The Agency also adopted restrictive interpretations of the subordination (postergazione) and holding period requirements, demanding the actual payment of the minimum return (hurdle rate) to other shareholders and the inclusion of five-year contractual lock-up periods.

Leavership clauses merit particular attention. While in the past, the right to retain carried interest in a "good leaver" scenario was considered sufficient to exclude a direct link to employment, the Agency now seems to place greater emphasis on aspects that underscore this connection.

It is therefore essential for all private equity fund managers and investors to carefully verify all requirements of the legal presumption and to properly structure contractual agreements. This structuring should aim to minimize any elements that could suggest a prevailing link to employment, considering the increasingly strict interpretive approach of the financial administration.

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