European carried interest regimes: insuring the risks

11 April 2023

This article explores aspects of European carried interest regimes that can cause difficulties and considers how insurance may present a possible solution to the risks.


Many western European countries have implemented favourable carried interest regimes in recent years in an attempt to incentivise fund management executives to relocate from more well-established fund management hubs such as the UK. While these regimes offer attractive headline tax rates for carried interest, such rates are available only to funds that meet various conditions imposed by those regimes.

For houses with European deal teams, there is a desire to give fund managers in those jurisdictions carried interest that qualifies for beneficial treatment under the relevant regime. Trying to structure a scheme so that it reflects the commercial drivers of the house while meeting the myriad conditions set out in the carried interest regimes of multiple European countries can be difficult (and in some cases, impossible) to achieve.

This article explores conditions that have caused difficulties for clients when structuring carried interest schemes for European deal teams and considers how insurance may smooth potential issues.

Difficult conditions – examples

France – equity investment condition

The French carried interest regime (also known as the Arthuis regime) was brought into force in 2009 and is the oldest specific carried interest tax regime in the EU. Despite its longevity, there remains a lack of guidance relating to the regime’s application in practice. This lack of guidance combined with the approach taken by the French tax authorities often leads to considerable uncertainty as to how the various conditions of the regime apply to the complex fund structures and strategies, which are commonplace in the market.

A number of the conditions set out by the French carried interest regime cause issues for clients, but we are focusing on the equity investment condition. This condition requires that the main fund vehicle that contains the carried interest rights vis-à-vis the investors must have a “main purpose to invest, directly or indirectly, in shares or other securities giving access to the share capital of non-listed companies”.

There are a range of views among French advisers as to how strictly this condition should be interpreted in the context of the fund vehicle’s investment restrictions. At one end of the spectrum, we have received advice that the fund vehicle in which the French participants hold their carried interest cannot hold debt instruments at all (other than convertible debt instruments that give access to share capital of the underlying debtor). This causes an issue for structures containing any back-to-back debt financing of the relevant asset holding company with respect to portfolio company debt (i.e. most private equity structures). Other advisers adopt a purposive approach with respect to the equity investment condition and are comfortable with the fund vehicle holding some debt financing instruments, provided that the main purpose of the fund is to make equity investments.

Spain – “tax haven” condition

The tax treatment of carried interest in Spain has been an area of uncertainty in recent years, with the tax authorities increasingly taking the position that all carried interest should be taxed as employment income. While some advisers were still prepared to give filing positions that carried interest proceeds could be treated as investment income in certain cases, the direction of travel was clear.

The introduction of a new carried interest regime in Spain from 1 January 2023 should alleviate this uncertainty as the regime confirms the tax treatment of carried interest as employment income and provides an effective 50% reduction in the amount of carried interest proceeds subject to tax. This beneficial treatment is conditional on meeting a number of eligibility requirements.

Given the novelty of the rules, there are a number of points still to be ironed out. One feature of the regime that has caused issues for certain fund managers is the “tax haven” condition. This requires that the carried interest proceeds payable to the Spanish carried interest participants do not derive directly or indirectly from an entity resident in another country which is either classified as a non-cooperative jurisdiction or with which no rules have been established on mutual assistance for the exchange of tax-related information (a “tax haven”).

The Spanish government maintains a list of “tax havens”. However, when the new carried interest regime came into force, the list had not been updated for a number of years and so still contained territories that had since signed treaties with Spain on tax information exchange. It was expected that, when the list was updated, these territories would be removed. However, when, the Spanish government published an updated list of “tax havens” on 13 January 2023, this list still contained a number of territories which had signed an information exchange agreement with Spain, including Guernsey.

The effect of this is that there is a risk that the Spanish tax authorities will challenge carried interest proceeds paid by funds that have Guernsey fund vehicles or whose Spanish participants hold their carried interest through Guernsey resident entities.

Fund managers who have historically structured their carried interest via Guernsey could restructure existing carried interest structures to avoid the issue (although this may create tension with meeting the requisite five year holding period under the Spanish carried interest regime). Fund managers with Guernsey fund vehicles, however, will not be able to avoid this issue and so will have to take a position despite the government list not matching the wording of the carried interest legislation, in order to fall within the scope of the rules.

When to consider insurance

The tax insurance market is growing in both size and sophistication, with increasing coverage of bespoke tax risks (as well as the standard W&I insurance packages seen on M&A transactions). In this respect, we have heard that insurers are increasingly willing to consider covering tax risks relating to carried interest schemes.

As set out above, European carried interest regimes often contain conditions that can be difficult (or impossible) to meet. Given the complexity of the conditions and the lack of available guidance or established practice, these conditions are often open to interpretation and can generate differing views between advisers. While this is frustrating when seeking overseas advice in the context of a transaction, acquiring insurance may offer some comfort.

Insurers have told us that they are generally willing to place tax risks provided that there is an interpretation of the rules that supports the approach being taken. As such, if an adviser is prepared to adopt such an interpretation, the risk is likely to be insurable. The premium payable will depend on the level of the legal opinion given (e.g. whether there is a filing position, or whether the opinion is that the position “should” or (even better) “will” be as proposed) as well as the size of the liability being insured.

With respect to both of the examples set out above, we are aware of houses that have taken out insurance to cover the risk that their carried interest schemes would not meet the conditions in question. As an illustration, taking the French equity investment condition as an example, we understand that the house insured the income tax risk and social security cost of the scheme not qualifying for the Arthuis regime for a premium of c.3% of the liability insured.


Where a fund manager is struggling to make its carried interest arrangements work across different jurisdictions that each have different conditions to meet, it may be helpful to consider insurance. This is especially the case where the fund manager itself (or an entity in its group) would have tax or social security liabilities if the scheme did not qualify in a particular jurisdiction. Given the range of opinions in the market concerning various conditions for carried interest regimes, we expect insurance to become a more popular solution for fund managers when structuring their arrangements. This means they can avoid making material changes to the commercial substance of their carried interest arrangements while protecting against the downside risk of their scheme not qualifying for beneficial treatment under a particular regime.