How is carried interest taxed in Spain under the IRPF regime?
Spain introduced a specific tax regime for carried interest under the Personal Income Tax (IRPF) through the Law for the Promotion of the Start-Up Ecosystem, effective from 1 January 2023.
Under this regime, carried interest received by managers of private equity and venture capital funds is generally treated as employment income for IRPF purposes. However, the legislation allows a 50% reduction in the taxable base of this income where certain conditions are met.
The reform was designed to provide greater legal certainty around the taxation of carried interest and to align Spain’s framework with other European jurisdictions to support the growth of the private equity and venture capital sector.
How does Spain tax carried interest?
Under the current rules, carried interest is classified as employment income for Personal Income Tax (IRPF) purposes.
This classification means the income is taxed under the general IRPF regime, rather than as capital gains. However, the law introduces a specific incentive intended to recognise the long-term and performance-based nature of these arrangements.
Key elements of the regime include:
- Classification as employment income under the IRPF rules.
- A 50% reduction in the taxable base applicable to qualifying carried interest income.
- The absence of a quantitative cap on the amount of carried interest eligible for the reduction.
When does the 50% IRPF reduction apply?
The reduction applies where the carried interest arrangement meets certain conditions established in the legislation. In particular, the following elements are generally required:
- Investors must receive a minimum return before carried interest is distributed to managers.
- The rights to carried interest must be held for a minimum period of five years.
- The income must arise from qualifying alternative investment funds or similar investment structures.
These requirements are intended to ensure that the regime applies to long-term incentive structures rather than short-term remuneration.
Which professionals can benefit from the regime?
The regime primarily applies to managers and professionals involved in the management of alternative investment funds, including structures commonly used in the private equity and venture capital sectors.
However, certain entities such as closed collective investment entities may fall outside the scope of the regime, depending on their structure.
In the Spanish legislation, carried interest is described as “special economic rights” granted to managers participating in alternative investment funds.
Advising on carried interest structures in Spain
The correct application of the carried interest regime requires careful analysis of fund structures, incentive arrangements and eligibility conditions.
Addleshaw Goddard’s tax team in Madrid advises private equity funds, venture capital managers and investment professionals on the structuring and implementation of carried interest arrangements, including assessing whether the conditions for the IRPF reduction are satisfied.
