Swedish court takes tough stance on carry

A recent Swedish court decision marks a turning point in a long running saga over the tax treatment of carried interest. Swedish GPs however remain optimistic that carry will continue to be taxed under favourable rates.

Nordic Capital’s employees could be facing a hefty tax bill after a Swedish tax court ruled that carried interest should be classified ordinary income and not a capital gain. 

Currently the standard income tax rate in Sweden is 57 percent (excluding payroll tax) while capital gains is taxed at 30 percent.

A couple of years ago the Swedish tax agency conducted audits on a number of private equity houses, but this is the first such case to come to court, albeit the lowest tax court in the country. 

“The tax agency here in Sweden has in recent years adopted their own interpretations of the tax law, which is not grounded in law, it is just simply a view that the tax authority has,” said Joakim Karlsson, a partner at Nordic Capital. “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,” he added.  

In the court's ruling it was judged that carry should be paid to the Swedish advisory company, who were seen as the active partner responsible for profit generation, and not to the entity that formally holds carry for Nordic’s partners. Market sources however expect this ruling to be overturned in higher tax courts. 


“When we read this verdict, we and all other experts that we have consulted with, have concluded that the verdict is void of law and legal references,” Karlsson said.

That view is backed up by 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.”

The fear of this decision spreading across jurisdictions was also dismissed by legal sources. Elizabeth Conway, tax partner in Linklaters London office, said in a statement: “There is no immediate sign, however, of changes to the tax treatment of carried interest gaining any traction. Carry continues to be taxed favourably in the UK and the US, the recent French proposals to tax carried interest as employment income have been largely reversed.”

The treatment of carry in Sweden has been an issue for some time now. Earlier in March the government unveiled plans to tax carry as ordinary income. However policymakers tried to appease the private equity lobbyists by calling for a hybrid system were carry is taxed as income up to a SKr5 million ($740,000; €562,000) ceiling, however finance minister Anders Borg eventually backed out of this plan despite calls from critics claiming the proposal was still too lenient.

Yolanda Bobeldijk contributed to this report.