1.    Overview

The new tax regime aims at discounting the taxation of the excess profit (i.e. profit in excess of the amount that the managers have contributed to the undertaking) attributed to investment managers or managers of target companies ("Carried Interest").

Starting from April 24, 2017, Carried Interest which meets the precise criteria set forth by the new law will no longer be taxed as "employment income", but will be taxed as either "capital income" or "other income", in both cases subject to tax rates significantly lower than those applicable to employment income ^[1].

Carried Interest falling outside the scope of the new law may be taxed as employment income, according to the circumstances.

2.    General Rule

Capital gain and dividends ("Eligible Income") taxable in Italy, deriving from participation in companies, entities and UCITS resident in Italy or in any white-listed country ("Eligible Entity") realized by employees and directors of: (i) the Eligible Entity; or (ii) other entities controlling or managing the Eligible Entity (collectively "Eligible Individual") through security attributing excess economic rights to the holder ("Special Security") is taxed as either capital income or other income, if the conditions below are met.

3.    Conditions applicable

a)    Special Security is held for: (i) not less than 5 years; or (ii) less than 5 years, but only if the Eligible Entity has undertaken a change of control or a change of the management company.

b)    Eligible Individual is investing no less than: (i) 1% of the net equity of the company or entity qualifying as Eligible Entity; or (ii) 1% of the investment made by UCITS qualifying as Eligible Entity. The amount of any Special Security granted to any Eligible Individual through a stock option plan taxable in Italy, as well as any other security subscribed by any Eligible Individual not qualifying as Special Security, is relevant for the purpose of calculating the 1%-investment.

Eligible Income is payable only after the initial investment capital as well as the minimum return set forth by the by-laws, or fund rules are paid to (i) all other partners of the company or entity qualifying as Eligible Entity; or (ii) all other participants of the UCITS qualifying as Eligible Entity. Payments are to be made by either the Eligible Entity or a third party taking over the Eligible Entity.

4.    Connection with taxation of stock option plans

The new law does not affect the taxation of stock option plans as set forth by the general tax code ("TUIR"). However, some care must be taken with the evaluation of Special Security for the purpose of calculating the taxation of stock option plans.

^[1] Capital income as well as other income enjoy a 26% flat rate as opposed to employment income which is subject to a progressive rate up to 43%.