On 16 March 2017, the Supreme Administrative Court (SAC) of Finland issued a ruling on the tax treatment of carried interest in a private equity structure. The SAC ruled that carried interest is taxed as income of the limited liability company, rather than income of the shareholders.
The case decided by SAC concerns a typical private equity structure in Finland. Under the structure in question, Finnish investment professionals are shareholders in a Finnish limited liability company, which in turn acts as the general partner in a Finnish limited partnership, together with a number of limited partners. The profit of the partnership was agreed to be distributed as 20% carried interest to the general partner after the limited partners' share of 8% hurdle interest. The issue at stake in the SAC was whether the carried interest is taxable in the hands of the Finnish investment professionals, or as income of the limited liability company (i.e. the general partner in the limited partnership).
The tax treatment of carried interest has been subject to an ongoing debate in Finland. Finnish tax authorities issued a study in April 2016 based on which they concluded that carried interest is primarily taxed as income of the investment professionals. Central Tax Board issued a ruling in November 2016 based on which carried interest is taxed as income of the general partner (i.e. the limited liability company in this case). The SAC decision upheld the ruling of the Central Tax Board.
The Finnish case concerns tax treatment of carried interest in a private equity structure that is very widely used in the Nordic countries. Although the SAC decision provides strong arguments against taxation at the level of the investment professionals, this ruling is unlikely to end debates about appropriate tax treatment in all cases. Many private equity structures are complex and the associated tax treatment in Finland for carried interest require careful considerations, as tax authorities are unlikely to stop their attempts to tax carried interest simply because of this case.
Taxation of carried interest in private equity structures is not just a Finnish issue. This is also a contentious topic of discussions between taxpayers and the tax authorities in Sweden. In the last few years, the administrative courts in Sweden have decided hundreds of cases on the taxation of carried interest. A major decision is pending from the Swedish Administrative Court of Appeal. New Swedish rules governing closely held companies have also been released for consultation and are due to be in place from 2018.