The taxation of “carried interest”: a global controversy

The taxation of “carried interest” in the US

The taxation of “carried interest” is subject to controversy. And it is in all those countries where venture capital companies and investment funds operate. A few weeks ago, the New York Times published an article. The text severely criticized the very favorable tax treatment received by the “carried interest” in the USA.

“Among many injustices in the United States tax code, few are as outrageous as the taxation of “carried interest” of private equity funds. This enormous fiscal benefit further enriches the already privileged financiers and violates the basic rules of justice and common sense. (…) President Obama recently suggested that he would ask Congress to close this gap (…) but the powerful financial lobby ensured that this injustice did not end (…) and once again there will be reasons to distrust our democracy and our capitalist system.”

Other readings on this subject:

Steuerle, C. Eugene. 2007. “Tax Reform, Tax Arbitrage, and the Taxation of ‘Carried Interest.'” Testimony before the US House of Representatives Committee on Ways and Means, September 6.

Viard, Alan D. 2008. “The Taxation of Carried Interest: Understanding the Issues.” National Tax Journal 60 (3): 445-60.

Extract from the taxation of carried interest in the US:

(…) Although the tax legislation, approved on January 1, increased the income tax rate from 35% to 39.6% for family units that earn more than $450,000, and for people who earn more than $400,000, income derived from “carried interest” was only taxed at 20%.

“Carried interest” – the benefit that a private equity manager receives for the funds he or she invests in – is currently treated as capital gains, which are taxed at a rate of 20%. However, a large number of academics and legislators have argued that they should be treated as ordinary income, as they are perceived through asset management and not a passive investment.”

However, the taxation of carried interest has achieved something amazing; Donald Trump and Hillary Clinton agreed on something.

How is “carried interest” taxed in Spain?

Currently, the same controversy also exists in Spain. However, the controversy is not taken to the street.

In Spain, “carried interest” is taxed at 27% as long as it has been generated during a period greater than one year.

However, the real difference with Spanish tax treatment comes from the taxation of labor income (ordinary) that, far from the American model (39.5% above $400,000) is 43%, above €52,361 euros gross per year.

How is carried interest taxed in the UK?

By agreement between the British Venture Capital Association and the HM Revenue & Customs, the tax rate applicable to “carried interest” is 28%.