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Swedish Tax Agency Loses Case Over Carried Interest

by Ulrika Lomas,, Brussels

07 November 2014

The Supreme Administrative Court, by denying Skatteverket, the Swedish tax agency, leave to appeal a ruling from the Administrative Court of Appeal made in December last year, has confirmed the tax treatment of carried interest by private equity companies as capital gains, rather than as income.

The case in question involved taxes paid in the past by NC Advisory AB, advisor to the Nordic Capital Funds, and concerned whether the share of the profits paid to investment managers on a private equity firm's investments – normally referred to as "carried interest" – should be taxed at the capital gains rate of 25 percent, or at the significantly higher personal income tax (PIT) rate of around 55 percent.

If carried interest had been considered as income, the Nordic Advisory would also have been subject to the payment of employer social security contributions.

The tax agency had asserted that carried interest is a performance bonus and therefore a form of income. However, the courts decided to examine if there is a correlation between the hours worked by an employee and the profits gained when divesting companies, and found that there is not. It was therefore ruled that it would not be sound to reclassify such capital gains into another type of income.

"The ruling by the Administrative Court of Appeal is clear, and we are pleased that we are now able to conclude these legal proceedings," said Joakim Karlsson, Managing Partner, NC Advisory AB.

Kristoffer Melinder, another NC Advisory Managing Partner, added that "it is positive for Sweden that we now have a legal ruling in place that encourages private equity funds, their advisors as well as international investors to invest in Sweden".

The case brought by Skatteverket against Nordic Capital is the first to be decided against a number of Swedish private equity firms that have been assessed with back taxes on the same basis, and may set a precedent.

TAGS: individuals | court | capital gains tax (CGT) | tax | investment | business | private equity | interest | equity investment | tax rates | social security | Sweden | individual income tax

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