NC Advisory AB on Administrative Court of Appeal ruling: ”This issue needs to be determined by a higher court”

April 27 2017

The Administrative Court of Appeal has ruled in favour of the Swedish Tax Agency on the issue of taxation of profit shares paid to employees of private equity firms. The court's rulings are prima facie inconsistent with precedent rulings, and now need to be analysed in detail.

According to previous Administrative Court of Appeal rulings, private equity fund profit-sharing is a return on invested capital and is divided among fund investors. Today's decision runs contrary to this legal precedent.

"The ruling that profit-sharing from investments in private equity funds is salary is erroneous and in contravention of previous Administrative Court of Appeal rulings concerning the company. Like all business sectors, the private equity sector needs clear, stable ground rules. The Administrative Court of Appeal's disregard of judicial precedent in this area creates uncertainty about operating conditions and handicaps our entire industry" said Klas Tikkanen, CFO at NC Advisory AB, advisor to the Nordic Capital Funds.

According to NC Advisory AB, the Administrative Court of Appeal also ruled incorrectly on the issue of taxing profit shares from private equity fund investments under close company rules (the 3:12 regulation of the Swedish Tax Code).

"We will be appealing the court's decision. None of the 19 individuals affected by the rulings fulfil the regulatory requirement of having considerable involvement in the companies at issue and, accordingly, a fundamental condition for applying the 3:12 regulation has not been met. We trust that the Supreme Administrative Court will recognise this," continued Mr Tikkanen.

"With this judgment the Administrative Court of Appeal has gone against its previous rulings in this matter - specifically, that carried interest is to be taxed as income from capital. This ruling contravenes this precedent. In terms of 3:12, the Administrative Court of Appeal has gone too far in expanding the scope of the Tax Code to apply the provision to a larger group of professionals. These are issues that need to be determined by the Supreme Administrative Court, and we are confident that the Administrative Court of Appeal's ruling will be examined and overturned," said Sven-Åke Bergkvist of Mannheimer Swartling Advokatbyrå AB, legal counsel to NC Advisory AB.

"The taxpayers reported all amounts in their tax declarations and also received questions from the Tax Agency regarding their declarations. The Tax Agency has been improvising for many years with various tax proposals. For the first few years, the Agency was entirely certain that this type of income should be treated as salary. Now, in recent years, the Agency has been pursuing the 3:12 issue. The Tax Agency and the taxpayers have devoted hundreds of hours to investigating the various issues. Under these circumstances, it is disturbing for a court not to realise that this is an extremely complex tax issue," continued Mr Bergkvist.

 

For additional information please contact:

Sven-Åke Bergkvist
Mannheimer Swartling Advokatbyrå AB
Legal counsel to NC Advisory AB
Tel: +46 709 77 74 56

Katarina Janerud, Communications Manager
NC Advisory AB, advisor to the Nordic Capital Funds
Tel: +46 8 440 50 69
Email: katarina.janerud@nordiccapital.com

 

About Nordic Capital

Nordic Capital private equity funds have invested in mid-market companies primarily in the Nordic region since 1989. Through committed ownership and by targeting strategic development and operational improvements, Nordic Capital enables value creation in its investments. The Nordic Capital Funds invest in companies in northern Europe and in selected investment opportunities internationally. The most recent fund is Nordic Capital Fund VIII with EUR 3.5 billion in committed capital, principally provided by international institutional investors such as pension funds. The Nordic Capital Funds are based in Jersey, Channel Islands, and are advised by the NC Advisory entities in Sweden, Denmark, Finland, Norway, Germany and the UK. For further information about Nordic Capital please see www.nordiccapital.com