Nordic onshoring remains elusive without political assurances

The Nordic private equity industry has been a world leader in transparency and environmental, social and governance issues in recent years, driven in equal parts by culture, regulations and LP pressure.

With 2017 likely to feature continued focus on the tax affairs of the private equity industry, the choice of offshore jurisdictions for buyout funds will be among the central topics in the debate.

Nordic private equity funds have historically opted for non-Nordic jurisdictions for their funds, incorporating primarily in Guernsey or Jersey, with Luxembourg or the Netherlands most popular among those opting for the onshore option. In recent years, Altor has been the only major Nordic house to bring its flagship vehicle home, domiciling its €2bn 2014-vintage Altor IV fund in Sweden.

In conversations with senior Nordic private equity professionals, ongoing considerations of domiciling upcoming funds locally indicates it is a topic for most GPs preparing to raise a new fund. "A lot of our peers are starting to look at bringing funds onshore," says a senior Nordic private equity partner, who spoke on the condition of anonymity. "What is pushing funds onshore is mainly the Base Erosion and Profit Shifting (BEPS) initiative, a tax regulation framework under the OECD."

There is a high degree of political and regulatory risk in the Nordic region. You never know what the politicians will end up doing, and there is regulatory risk around the application of laws" – Nordic private equity partner

BEPS is a programme aimed at "tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity", according to OECD.

"Pushing in the same direction, you have public perception and the suspicion with which regulators and the general public view offshoring," the partner says. Offshore jurisdictions are broadly associated with tax avoidance in the eyes of the public, as well as some regulators, he says. Overall, there is a push from the Nordic investment industry in general, as well as regional LPs, towards improving tax transparency.

However, if Nordic private equity firms do choose to onshore their vehicles, they rarely end up choosing a Nordic jurisdiction.

Risk and reputation
Domiciling funds onshore can offer some degree of protection against being targeted under the BEPS framework in the future, as well as a substantial improvement in public perception and being seen to be paying your fair share of taxes – a central tenet of the Nordic model and social contract.

In its current state, the Nordic region is viewed as unsafe from a tax regulation perspective. The regulatory framework surrounding taxation of private equity profits at the company, fund and practitioner level remains unpredictable and at risk of political targeting. "There is a high degree of political and regulatory risk in the Nordic region. You never know what the politicians will end up doing, and there is regulatory risk around the application of laws," says the source.

As such, the risk of private equity funds or investors being hit by double taxation or being used as a punching bag for political capital is severely damaging prospects of bringing fund domiciles to the Nordic countries.

"Our LPs don't have a problem with funds being domiciled offshore, we don't have a problem with it, and regulators don't have a problem with offshore structures," the private equity partner says. He considers the problem to be with politicians and the general public, who have trouble differentiating between Luxembourg and Jersey as legitimate tax jurisdictions on one hand, and tax havens such as Panama, Mauritius or Tuvalu on the other.

Pushing in the opposite direction, there is a perception in some countries, such as Sweden, that firms looking to offshore funds is a sign of increasingly militant regulatory bodies and tax authorities, the partner says. Offshore jurisdictions offer a regulatory and enforcing climate that is clear and stable, but still above board.

Without clear and unequivocal assurances by Nordic governments and regulators, there is little hope of seeing local fund jurisdictions becoming the norm, despite the will to do so under the right conditions being present among private equity funds and their investors.

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