EQT fights retroactive tax

EQT will appeal the Swedish tax authority's ruling that carry payments between 2007 and 2009 should be deemed income and not capital gains.

EQT Partners is fighting the hefty tax bill the Swedish tax authority, Skatteverket, has presented the firm after it announced it would retroactively tax the firm’s carried interest payments between 2007 and 2009.

EQT is confident it will prevail in its appeal. “We are pretty sure we won’t lose. The decision is so obviously wrong and we have difficulties to see how the tax authorities will get legal support for the case,” the firm said in a statement.
The Swedish tax authority ruled that carried interest received by executives at EQT should be taxed as ordinary income and not capital gains. Currently the standard income tax rate in Sweden is 57 percent (excluding payroll tax) while capital gains is taxed at 30 percent. 

EQT disputes the tax authorities' claim arguing its carry structure has long been accepted. “It is rather odd to claim that this should be taxed completely different now given that the income declarations have been approved by the authorities for almost 20 years,” Johan Bygge, EQT’s chief operating officer, said in a statement.

The firm argued the tax authority was reinterpreting earlier tax decisions without any new material emerging to support its claim. “Clearly, the tax agency has decided to make a different interpretation of the legislation without any reasonable grounds whatsoever,” added Bygge.

“We also believe that a retroactive interpretation, especially when it is not based on any material new information, is really dangerous and creates a huge uncertainty for the Swedish system as a whole.”

But the Swedish tax authority's Helene Bigander said, that after inspecting EQT's carried interest structure, the compensation EQT executives received was for job performance and so should be taxed as income.

Bigander also refutes EQT's claim that the Swedish tax authority has changed its position on the matter. “In 2007 we started to look at private equity and we started to look at EQT and other firms; we didn’t have much information and so when we looked a bit deeper we realized this was income and not capital gains and so should be taxed accordingly. So we don’t think we have changed our mind because we didn’t have an opinion in the first place.”

The firm recently made moves to become more “open and transparent”. In June, it moved all of its funds onshore under a holding company with “a very classical Swedish governance structure”, with an independent board, Conni Jonsson, the firm’s managing partner, said at the time.

Jonsson insisted the new structure was not meant to appease policymakers. “We don’t see this as a way to please the tax authorities; we see it as beneficial for the future of our business. If they think that we are doing something that will make it easier for them to decide on what to do going forward, that’s fine,” he said. 

The row over EQT's taxes is not the first time that the tax practices of private equity firms in Sweden have come under fire. In January Sweden's finance minister, Anders Borg, closed a tax loophole that allowed companies to borrow money at high rates of interest from a firm in the same group. The Swedish company had been allowed to then write off the interest costs – reducing its tax bill. 

Carry also came under pressure in December last year when a Swedish tax court ruled that carried interest should be taxed as income. However, this was at the lowest tax court and private equity professionals in Sweden seemed unfazed. 

“The Swedish tax authority has been on these types of innovative fishing expeditions before and at the end of the day when things are tested in the higher courts, they have lost in all cases so far,” said Joakim Karlsson, a partner at Nordic Capital, at the time.

Legal sources, too, dismissed the December ruling. Mats Anderson, senior counsel at law firm Linklaters' Stockholm office, who said: “The fact that the private equity guys have lost it in the first court should not be too depressing as normally the tax agency wins in the low court.”