UPDATE 2-Victory for private equity in Swedish tax case

Thu Dec 19, 2013 11:51am EST

* Swedish court rules in favour of Nordic Capital

* Verdict likely to be decisive for similar cases

* Leaves tax claims of more than 4 bln SEK in doubt (Adds quotes, background, detail)

By Sven Nordenstam

STOCKHOLM, Dec 19 (Reuters) - Sweden's private equity industry won a major victory on Thursday as a court struck down an earlier tax verdict that would have meant billions of crowns in higher taxes and raised doubts about Stockholm's future as a hub for the lucrative industry.

The legal battle was the first in a string of similar cases and likely to set a decisive precedent between Sweden's tax agency and private equity firms, which were facing more than 4 billion Swedish crowns ($612 million) in back taxes.

An administrative court of appeal said profit sharing, called carried interest, received by partners in private equity firm Nordic Capital should not be considered as salary paid from Nordic's Swedish advisory firm, which the tax agency had argued.

A victory for the tax agency would have dealt a significant blow to the Swedish private equity industry, which is one of the world's biggest relative to the size of the country's economy.

"The verdict is a stinging rebuke of how the tax agency and the administrative court have behaved," said Sven-Olof Lodin, a professor of fiscal law and author of several books on taxation.

The verdict means the advisory firm, NC Advisory AB, which was facing back taxes and fees of more than 500 million crowns, cannot be taxed for the carried interest.

The tax agency had said carried interest was revenue for the advisory firm which it had then paid out as salary to partners.

The court declared that carried interest was not tied to work performance, meaning that a related case against 19 Nordic Capital partners, still being handled by the lower court, will also fall.

The partners had been billed almost 1 billion crowns by the tax agency, which argued they were liable to pay wage taxes at a rate of up to 57 percent, rather than capital gains tax of up to 30 percent.

"We are relieved. It is good that the verdict is so clear," said Kristoffer Melinder, managing partner at NC Advisory AB.

The tax agency said it would analyse the verdict before deciding whether to appeal.

An increasing number of countries, including the United States, are trying to raise taxes from the lucrative private equity sector.

The court said the agency's investigation had been "marred by flaws" and that its arguments were in part "scantily substantiated", while noting that the previous verdict, from the lower court, had been sweeping in its wording.

Lodin, one of Sweden's foremost tax experts, said the Supreme Administrative Court would not necessarily agree to hear the case even if the agency decided to appeal as the verdict was clear-cut and left little room to argue for a re-trial. (Reporting by Sven Nordenstam; Editing by Niklas Pollard and Mark Potter)

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