* Swedish Tax Agency prepares bills and fines buyout bosses
* At least eight Swedish and global firms face tax probe
* Sweden wants to tax buyout bonuses at up to 55 pct
By Simon Meads and Sven Nordenstam
LONDON/STOCKHOLM, Nov 7 Sweden is widening a
probe into the tax affairs of private equity dealmakers, as part
of a clampdown which has already led to bills for hundreds of
millions of dollars of back taxes.
The Scandinavian country has become the largest private
equity market in Europe in recent years, relative to the size of
its economy, with deals worth almost $5 billion agreed in 2011.
But the boom, which has continued with recent deals for
alarms firm Securitas Direct and cable group Com Hem, drew the
attention of Sweden's tax authority.
Now many of the industry's top earners are bracing for back
tax claims as investigators trawl through tax returns and
earnings declarations going back to 2005.
"We are working on another couple of private equity firms,"
Goran Haglund, tax auditor at the Swedish Tax Agency, said,
adding tax bills could be issued by Christmas.
Around the world, private equity bosses are often better
paid even than investment bankers and the biggest part of their
pay - performance fees known as carried interest for making
profits on deals - is taxed at lower rates than income tax.
For private equity firms and their partners, who earn
multi-million dollar fees on buying and selling companies, the
tax savings by exploiting such loopholes can be significant.
But the Swedish Tax Agency wants to tax the majority of
private equity bonuses at the highest income tax rate of 55
percent, not at the capital gains rate of up to 30 percent.
Private equity partners argue they deserve preferential
treatment because they are betting their own money. But many
firms only contribute between 1 and 3 percent of the capital in
a fund, while taking 20 percent of the profits as bonuses.
Sweden's private equity industry has been under scrutiny
since 2007, when a spate of high-profile deals, including the
buyouts of healthcare businesses Capio and Gambro, led to a
pilot study into Nordic Capital and IK Investment Partners.
Tax authorities noticed private equity firms were paying tax
at low rates or, in some cases, not at all. And the ensuing
crackdown is being fought by the private equity industry, which
argues it is unfair particularly because it is retrospective.
The crackdown could make Sweden one of harshest tax regimes
for private equity in the world, but is in tune with global
moves to target buyout bosses and close tax loopholes.
"Our tax authority is trying to change the interpretation of
the law and is attempting to radically increase the taxation of
the partners retrospectively," said Marie Reinius of the Swedish
Private Equity and Venture Capital Association.
The association represents 126 private equity and venture
capital firms, as well as private equity investors.
"There are lots of countries looking at (bonuses) and how
(they) should be taxed (but) those countries are looking into
how it should be taxed in the future," Reinius said.
Nearby Denmark already taxes buyout bonuses as income and
Norway is investigating its own private equity industry.
And in private equity's largest market, the United States,
some predict a tougher tax regime as reelected President Barack
Obama seeks to plug the budget deficit. The carried interest
break costs the United States an estimated $18 billion a year.
Obama has said he favours eliminating the tax break which
lets private equity executives pay tax at the capital gains rate
- just 15 percent in the United States - rather than the top
ordinary income tax of 35 percent.
Apollo Global Management chief Leon Black said the
tax break could fall victim to deficit reduction efforts.
"I think carried interest was on the table whoever won,"
Black told Reuters on the sidelines of a conference. "The fact
is we have a big deficit and both parties are going to have to
look at different sources of revenues."
The Swedish Tax Agency's Haglund declined to say which firms
or individuals would receive tax claims, but EQT, the buyout
firm backed by the Wallenberg family, and Nordic specialist
Altor are expected to face bills, some tax experts say.
No-one at either firm could be reached for comment.
At least eight firms, including international players, can
expect to have their affairs probed as the Agency allocates some
2,500 working days to the inquiry next year, Haglund said -
equivalent to 13 or 14 full-time employees, compared with three
or four part-timers at the start of the probe.
Some have already felt the effects.
After recalculating incomes for 2007 and 2008, the tax
agency hit 19 Nordic Capital executives with bills totaling $118
million, and penalties of nearly $32 million at the end of 2010,
based on total earnings of $231.2 million.
Co-founder Robert Andreen alone was slapped with a $35.1
million bill and $1.3 million penalty, after the Agency
calculated he had made some $78 million in those two years.
Yet this tax bill is dwarfed by the one that Bjorn Saven,
executive chairman of IK Investment Partners, received a year
later. He has been told to pay $77 million in back taxes and a
penalty of $30.8 million for 2005 to 2008, with the Agency
calculating he earned more than $147 million in the period.
Nordic Capital, Andreen, IK and Saven declined to comment.
The firms are contesting the tax demands through the courts
and have yet to pay anything towards the bills, which is fueling
public anger and in turn sustaining the public process.
Despite private equity's claims to create wealth for
retirees, whose pension funds put money into the industry, and
that it invests in companies and creates new jobs, there is
acceptance among some that things will change.
"These are high amounts and our industry has been bad at
justifying what we do and why it is valuable to society," said a
partner at one of the firms who has been subject to a tax bill.
"I think that is the challenge for us."