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Carried interest becomes capital income, another step in the Italian government’s opening to venture capital

NewsFromThePlatform | August 3rd, 2017

The latest news in terms of tax incentive comes after a strong injection of funds (just under 4 billion Euros) into start-up investing: it might finally be a good time for the Italian VC industry

Carried interest will be taxed as capital income and no longer as income from work. This is just the latest of many regulatory innovations introduced in venture capital over the last year. Indeed, since the Industry 4.0 plan of 2016, government attention to start-up funding has increased considerably. In short, policy makers have noticed the importance of venture capital, which is also more and more often in the radar of well-established companies, which see start-ups as a source of innovation, almost as R&D laboratories that can add know-how and help the business grow, in the name of open innovation.

So let’s see what the main innovations of 2017 are for those who invest in venture capital – they are all or almost all tax-oriented and aimed at letting the industry take off. The latter, mentioned in the opening, is the Law no. 96 of 21 June 2017, published in the Official Journal no. 144 on 23 June 2017 (Ordinary Supplement No 31). This is the law that converts DL 50/2017, that contains the 2017 corrective manoeuvre. In the art. 60 of the so-called “manoeuvre”, the tax treatment of carried interest is discussed.

Carried interest is the bonus that private equity and venture capital fund managers receive on their performance. That was finally aligned with the EU regulations from the point of view of taxation. The tax treatment of managers’ bonus on venture capital funds is now equal to that of any capital gain, and is no longer considered as income from work. This means that it is no longer subject to an Irpef tax (which ranges from 23% for incomes below 15,000 Euros to 43% for those over 75,000 Euros) but is only subject to a 26% tax just as the returns on any financial instrument.

This new rule should prevent the elusive mechanisms used by the managers to avoid taxation and it should also attract foreign managers to Italy,” says Fabrizio Barini, head of business Development of Intermonte SIM, to P101. Intermonte, through a series of partnerships, has become the reference Equity Crowdfunding SIM in Italy, having collected over 1.6 million Euros and 850 investors. “Crowdinvesting – says Barini – is the area of biggest growth in the financial industry, with an increase of 151% from 2013 to 2014 and 92% in 2015 worldwide. The industry is worth today 5 billion Euros. In Italy, this type of alternative investment has enormous potential, at least 0.6% of household savings: it’s a total of 9,000 billion Euros. However, the Italian venture capital is very small and underdeveloped: 0.3% of the global VC, compared to a domestic GDP of 2.5%.

A gap that needs to be filled. And it could be done starting from these incentives.

Most of the new incentives are included in the Industry 4.0 plan in the 2017 Budget Act. For investors in innovative start-ups and UCITS, the most important of them is “A stable 30% tax deduction (previously, it was 19%) for investment up to one million Euros – Barini explains – which alone should bring start-up investment to one billion by 2020. A monstrous figure for a country like Italy, where venture capital is worth just over 100 million (2016 Aifi data about early stage investment). This will be a good “shockwave” and will possibly take us to the same level as Spain or 2015 Germany.

The biggest deductions are worth 278 million Euros, but public investment in innovation is even more. Through what has been called the first post-crisis expansive Stability Law, one that outlines an industrial policy that has been buried in the name of austerity for years,  350 million Euros are being invested to refinance national and regional interventions in support of self-employment and start-ups. Besides these, 252 million Euros are dedicated to give the chance to listed companies to buy at least 20% of their subsidiaries’ financial loss (i.e. to sponsor them by absorbing their loss for the first four years). Furthermore, all Italian SMEs are given access to online fundraising portals; and Deposit and Loan Bank, social security institutions and Inail are called to action to create early stage investment funds.

These incentives sum up to a total value of 1.35 billion Euros and are expected to attract additional 2.5 billion by private investment. An unprecedented “firepower” for our country.