Swedish private equity partner loses in tax case
The Swedish Supreme Administrative Court (Sw. Högsta Förvaltningsdomstolen, “SAC”) has published a verdict on the appeal from a former private equity fund partner. It deals with the applicability of the Swedish closely held company-rules (“3:12-rules”) on distributions from the partner’s holding company and has precedence for Swedish PE partners.
Through separate holding companies, the partner of a Swedish private equity fund advisory company owned shares in three Dutch management companies. Each of these managed a private equity fund in accordance with advice received from the Swedish fund advisor. The privately held companies received distributions which were classified as carried interest and declared to be capital income. His argument being that his shares in the holding companies were not qualifying shares according to the 3:12-rules explained briefly below.
According to the 3:12-rules, distributions from “qualifying shares” in closely held companies (Sw. fåmansbolag) shall be partly declared as labour income and partly income from capital. A share is “qualifying” if the shareholder during the taxation year or any of the five previous years has been significantly involved in the company’s business or in any closely held companies directly or directly owned by this company.
The question before the court was if the partner, through his employment in the advisory company, was significant for the business in the management companies. The SAC decided that this was the case and that his shares in the holding companies therefore were qualifying. Consequently, that the distributions he received from the holding companies should be taxed according to the 3:12-rules which resulted in a significantly higher taxation.
The SAC states that the precedence of this verdict shall be that a person may be considered significant for the business in a closely held company even if the person is employed in another company and within the framework of his employment provide services to the closely held company.
Several other partners, 57 to be specific, of reputable PE companies had also appealed similar cases before the SAC but was not granted leave to appeal. It is likely that the Swedish Tax Agency will apply this verdict to the taxation of these partners and consequently, tax their received carried interest partly as labour income according to the 3:12-rules.
This verdict is of great interest to all private equity fund partners in Sweden as it has general precedence on the applicability of the 3:12 rules and therefore taxation of capital income from closely held companies. PE partners should therefore assess their ownership structures and plan for how to report income from their holding companies to the Swedish Tax Agency moving forward.
Do not hesitate to contact Permian in case you have any questions to this article.
Stockholm/Oslo, 19 June 2018
Espen Iversen Størseth, Legal Counsel
Axel Høvo Daasvand, COO