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PE houses beware: Swedish tax agency presents new strategy on industry tax review

In November 2014, the Supreme Administrative Court delivered judgments in 2 cases regarding the taxation of 'carried interest'. On the same subject, the Swedish tax agency has undertaken a review of private equity (PE) houses and is to present its go forward approach when dealing with these types of cases. Taxand Sweden highlights how this will impact the PE market.

In December 2013, the Administrative Court of Appeal, as opposed to the Administrative Court, held that carried interest should not be included as business income for a Swedish PE advisory company, and that the company should not be obligated to pay employer’s contributions on the amounts. The tax agency appealed the judgment and applied for a review permit with the Supreme Administrative Court. In November 2014, the Supreme Administrative Court decided not to pass the review permit. The judgment from the Administrative Court of Appeal therefore stands.

The carried interest had been paid out of the underlying private equity funds to certain key individuals employed by the advisory company. The tax agency had argued that the payments was a result not of the individuals investing into the various funds, but rather a result of the professional advisory services performed by the key individuals in their capacity as employees in the advisory company. The tax agency had further argued that the carried interest, tax wise, should be deemed to have been first received as taxable advisory fees by the advisory company and then immediately paid out as salary to the key individuals (hence the demand from the tax agency for the advisory company to pay employers contributions).  

The Supreme Administrative Court has also affirmed an advance ruling from the Swedish Tax Board for Advance Rulings. In this case the advisory company (rather than its employees) had the owner interests in the Fund vehicle. The Board found that carried interest was taxable as business income (rather than exempt capital gains). The private equity structure in this case was, however, partly different from the structure assessed in the case, and from many other private equity structures with connection to Sweden.

The tax agency has, in a press release, explained its interpretation of the rulings from the Supreme Administrative Court and presented the consequences that the rulings will have for the tax agency’s review of private equity companies, their partners and their employees going forward. According to the press release, the tax agency will not continue to pursue proceedings concerning the Swedish advisory companies’ obligations to pay employer’s contributions on carried interest received by employees of the advisory companies. The tax agency will, however, continue to ask the courts to examine whether the amounts received by employees in advisory companies shall be taxed partly as income of employment at a progressive tax rate, and partly as capital gains, according to the special rules applicable for owners of closely held companies.

The tax agency will further investigate whether trustees of foreign private equity funds should be considered to have a permanent establishment in Sweden and therefore be taxable in Sweden in the future. The tax agency will also analyse transactions where carried interest has been paid to foreign endowment insurances and where taxation has not occurred.

It is unclear if the tax agency will try to raise these questions in the already pending cases or if this will be done in the framework of new proceedings only.

Since the tax agency has decided not to pursue companies’ obligations to pay employer’s contributions, they will most likely also drop proceedings regarding taxation of carried interest as employment income. 

Your Taxand contacts for further queries are:
Niklas Bang
T. +46 40 107 192

Ida Larsson
T. +4673-640 91 54

Taxand's Take

The fact that the tax agency stated in their press release that they will investigate whether trustees of foreign private equity funds will 'be liable to Swedish tax in the future' indicates that they will not initiate proceeding regarding the taxation of trustees of foreign private equity funds for former years. However, this is only an indication.

In summary, some clarification has been given, but new issues have been added. There is still a lot of uncertainty concerning the taxation of private equity. One thing is clear however, the Swedish tax agency has not given up its pursuit to increase the outtake of tax from this sector. Great precaution and care of structural details is highly recommended!  

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