Swedish Tax Agency getting tough with private equity – and consultants
The Swedish Tax Agency (the ”STA”) has in two initial reassessment decisions dated 20 December 2012 decided to reassess the private equity firm EQT in relation to carried interest and the audit firm PwC in relation to benefit taxation.
EQT – carried interest
The STA has in an initial reassessment decision (dnr 450 860306 12/5472) decided that an amount equal to the carried interest received by partners of EQT, in connection with the sale of portfolio companies during the income year of 2006, shall be taxable in the hands of the advisory company of EQT, EQT Partners AB. In the view of the STA, the carried interest is remuneration for work performed by certain employees of the advisory company in their capacity as employees of that company. Consequently, the remuneration paid should rightly be attributable to the company and the STA is of the opinion that it should therefore be taxed as income from business activities in the hands of EQT Partners AB.
The payments received by the partners is seen as dividend distributions from EQT Partners AB, since the partners are shareholders.
The STA has levied a tax surcharge on EQT Partners AB amounting to 40% of the taxable income. EQT has announced that they will appeal the decision.
Please note that the STA has initiated several processes targeting PE. In these processes, the STA is arguing that the recipient should be taxed for the carried interest as employment income and that the employer (the advisory company) should have paid social security contributions on the corresponding amount. In a similar process against Nordic Capital, the Administrative Court in Stockholm ruled in favour of the STA in a judgment announced on 6 December 2012.
PwC – taxation of benefits The STA has decided to reassess (reference no AG21) the audit firm PwC’s Swedish branch (PricewaterhouseCoopers i Sverige AB), and certain partners of the company. The STA has decided that PwC’s basis for social security charges should be increased and that the partners should be taxed on the benefit they received when they were offered to buy shares in the company at a price, that according to the STA, was below market value.
Partners were able to purchase shares at a price equal to the nominal value of SEK 10. For the financial year 2009/2010, the shares gave total dividend distributions of SEK 20 500/share. There is a shareholders’ agreement between the partners outlining extensive restrictions on the shares. The question in this case was whether the partners had received any benefit which, in that case, would be taxed as employment income (progressive tax rate of up to approx. 60%) and be subject to social security charges for the company (tax rate of approx. 32%).
The STA’s decision shows that the company had not made any formal valuation of the company’s shares and the company argued that there was no goodwill in the company and it also referred to the principle of ”naked in – naked out”. Both PwC and the STA sought expert opinions as regards the valuation of the shares. According to the STA, the market value of the shares was approx. SEK 35 000, which is the amount that the STA used as the basis for its decision.