Buyout Funds in ‘Shock’ as Swedish Tax Nightmare Becomes Reality

Updated on
  • Verdict is biggest landslide to hit the industry, EQT CEO says
  • Thomas von Koch says it would be ‘easy’ for PE firms to move

The biggest private equity fund in the Nordic region says a recent Swedish tax decision may be devastating to investments in the country.

Thomas von Koch, the managing partner running EQT AB from Stockholm, says he’s in shock after a Swedish court ruled that he and others working in his industry will need to treat income from investments as salary. The decision, which affects income earned as long as a decade ago, may make it hard for parts of the industry to continue operating in the country, von Koch said.

“The implications for the whole financial system are immense,” the EQT chief executive officer said in an interview on Friday, shortly after the decision was announced. “This is the biggest landslide ever to hit the industry. We’re shocked.”

Sweden Inc.

The Stockholm appeals court ruled last week that some of the profit-sharing from investments in private equity funds should be treated as salary rather than capital gains, backing the tax authority’s argument that partners were employees in consultancy firms, paid in carried interest. The decision, which directly affects about 85 employees in the industry, marked a victory for Sweden’s tax authority after it lost a similar case in the same court in December 2013.

The tax authority argues that because payments are partly based on performance, they can be regarded as salary. It estimates that the employees affected will need to make additional tax payments of 2.3 billion kronor ($261 million) after the verdict, though von Koch says the real number is probably considerably higher.

Read more about carried interest

After the previous setback, the authority asked courts to retry the case, based on new arguments, to claim higher tax payments for the years 2007 to 2012. Von Koch said the drawn-out legal process has injected an element of unpredictability into corporate Sweden that threatens the country’s investment future.

“This is not just a private equity issue. This is an investment-in-Sweden issue,” he said. “It’s the retroactive factor that is the killer. It will be 11 years before we know our tax rate.”

Nordea HQ

The decision comes as Sweden faces the defection of Scandinavia’s biggest financial conglomerate, Nordea Bank AB, which is threatening to move its headquarters from Stockholm unless the government takes steps to cut the cost of banking in the country. Nordea, which expects to announce its decision before the summer, is already being wooed by Denmark and Finland, with both countries listing the potential benefits to the bank of moving its headquarters to their capital cities.

Private equity firms in Sweden managed some 450 billion kronor in 2015, representing 11 percent of the country’s GDP. Portfolio companies backed by private equity employ about 200,000 people in the nation of 10 million, according to the Swedish Private Equity and Venture Capital Association.

EQT isn’t yet looking into moving its main office from Sweden, von Koch said. But he estimated that a relocation would only take about six months.

“It’s easy,” he said. "If you live in an environment where you don’t know the rules, it’s very hard to conduct business."

Tomas Algotsson, head of the tax authority’s legal department, said the appeals court decision gives clarity on how carried interest should be regarded.

Supreme Court

“We want the tax rules to be clear and predictable,” Algotsson said. “However, in reality, the transaction methods and the availability of information also affect the investigation and legal process. These are complex issues, which means that the processes take time.”

The private equity industry is still hoping the latest ruling isn’t the final word, and wants Sweden’s Supreme Administrative Court to review the case.

“There are a lot of questions about what this really means,” Elisabeth Thand Ringqvist, chairman of the Swedish Private Equity and Venture Capital Association, said. “If this is not heard by the Supreme Administrative Court, there will also be a lot of uncertainty for other investors and entrepreneurs.”

— With assistance by Kim McLaughlin

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