New tax consultation on the classification of “carried interest” derived from the ownership of shares in venture capital funds

On December 7, 2016, the Spanish Directorate General of Taxes (DGT) issued a binding tax resolution number V5220-16, analyzing the tax treatment of ordinary and special distribution of profits derived obtained by a holding company from its participation in various classes of shares of venture capital funds. The holding company in question was the promoter of venture capital funds managed by a management company that was 100% owned by the holding company.

The DGT, maintaining the criterion reflected in the handful of administrative pronouncements that have been published to date (DGT 1688-03 and V1868-05), stated that “in relation to the carried interest to which the query refers, it does not appear to respond to an economic concept of dividend, but rather is assimilated to the consideration obtained by the management entity as a consequence of the activity carried out by the latter and without which it seems to be linked to those who are the partners of the same, so that such income must be integrated into the tax base as income from economic activity.”

Thus, with the answer to this new binding tax resolution, the DGT continues to maintain a simpler and more formal understanding of the tax classifications of carried interest without analyzing in detail—at least in the reply—the characteristics of the classes of shares issued by the venture capital funds, and without assessing whether the investment in the same is closer to an investment in capital, that is, without taking into account, inter alia, circumstances such as the transferability of shares, the volume of investment, the possession of such class of shares by independent third parties under similar conditions, or whether ownership is intrinsically linked to the employee status of the manager and the management activity.

February 22, 2017