Nordic draws line under tax row

Nordic Capital has won its longstanding fight with the Swedish tax authority after the Supreme Administrative Court denied the Swedish Tax agency to appeal a decision made last year which cleared buyout firm Nordic Capital of a retrospective tax bill.

Last December, Nordic won its appeal against an earlier ruling by a Swedish court that it needed to pay income tax on previously-earned carried interest, reportedly totaling 702 million kroner ($108 million; €79 million).

The tax agency argued that carried interest paid to fund managers should be classified 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.

“The ruling by the Administrative Court of Appeal is clear, and we are pleased that we are now able to conclude these legal proceedings,” says Joakim Karlsson, co-managing partner, at Nordic, said in a statement on Wednesday.

“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. Sweden as a country has thereby demonstrated awareness of the private equity industry’s value for building a stronger, more enterprising Sweden,” Kristoffer Melinder, co-managing partner at Nordic, added in the statement.

The ruling draws a line under the ongoing case which had led to uncertainty for both GPs and LPs in Sweden. In September, Gabriel Urwitz, managing partner of Segulah, and chairman of the Swedish Private Equity & Venture Capital Association, said the reason the Swedish tax authority went after the private equity industry was likely driven by public opinion. “I don’t think the tax authority has been pursuing the tax case against a number of Nordic-based firms on a legal basis. But instead they decided to go after a number of firms because they have made a lot of money. It’s quite populist, I don’t know what it has been driven by. But once the tax authority got into this and invested a lot of money to make this case, then it’s becoming quite difficult for them not to continue.”

The intense scrutiny of private equity – and the tax GPs pay — has led EQT and Altor to move their funds onshore. But while the tax case was ongoing not many firms have followed suit. “We are talking about past tax structures. Until these cases are solved, I don’t think many GPs will move onshore because it’s just too unclear at the moment how things stand from a regulatory standpoint,” Richard Burton, head of PwC’s private equity practice in the Nordics, said back in September.

“We would love to [move onshore],” Karlsson said. “Altor has moved onshore and they have a very interesting structure, which we may look to replicate. There are, however, still uncertainties around it and it has to be a structure that LPs are comfortable with. You need stable, foreseeable and competitive rules. And that is not the case in Sweden right now, if you consider the recent tax case against NC Advisory, the investment advisor to the Nordic Capital Funds. Retrospective tax is completely unheard of. So in order for firms to move onshore, you need a stronger political commitment to long-term, stable and competitive rules in this area for it to happen.”