EQT tax ruling sends shivers through Swedish PE industry

On 20 August the Swedish tax authority Skatteverket announced its decision to tax EQT with a SEK 670m bill. In total, 19 employees and partners at Sweden's largest private equity firm EQT will have to pay an additional SEK 313m, of which SEK 88m consists of a penalty for giving inaccurate information. The wider investigation concerns the years 2008, 2009 and 2010 – overall, around 70 Swedes will have to pay SEK 3.6bn if the tax authority gets its way.

EQT's COO Johan Bygge says Skatteverket's decision to revise its previous interpretation of this part of the tax law means that 18 years of policy is now invalid. "We can establish the fact that Skatteverket has chosen to reinterpret previous decisions," says Bygge. EQT has vowed to fight the back tax.

This latest development in the carried interest tax battle brings the overall amount owed by Swedish private equity firms to a whopping SEK 5.3bn, according to calculations carried out by Swedish financial newspaper SvD Näringsliv.

After EQT's SEK 670m bill, changes to carried interest taxation could have serious repercussions for Swedish PE

IK Investment Partners' founder Björn Savén owes SEK 875m, Nordic Capital's founder Robert Andreén SEK 298m, and Altor's Harald Mix SEK 235m. EQT's CEO Conni Jonsson, who was part of the original team that founded EQT in 1994, "gets away" with a mere SEK 36m. What is surprising in EQT's case is that three people – Håkan Johansson, Jan Ståhlberg and Thomas von Koch – will all have to pay more than their CEO with SEK 89m, SEK 66m and SEK 38m respectively.

The amount of taxes due obviously means that the partners' earnings have been outstanding too. Swedish business journal Veckans Affärer acknowledges key figures in the Swedish private equity industry have personal wealths of SEK 1-2bn each.

Other ongoing court cases are meanwhile dealing with the internal rate of interest that companies are allowed to set for the loans they grant each other within a holding group, in order to minimise tax. According to Skatteverket, the internal rate of interest shouldn't be too high compared with the rate for external loans. Skatteverket lost a case regarding the internal loan rates during the summer, while the tax authority has mostly won the rounds concerning carried interest.

Gabriel Urwitz, founder of Segulah and chairman of SVCA, is concerned. "Everyone in the trade has the same opinion: Skatteverket doesn't have a case," he says, before adding, talking of SVCA's role: "The processes are individual and there is not much SVCA can do regarding these processes. If we as individuals could have done something different I have to answer 'no'. We have for 15-20 years been declaring our carried interest in a certain way with the assumption that it should be taxed as capital gain without any comments from the tax authority (STA). All of a sudden STA changes its view and says it should be taxed as personal income. That change we could not anticipate. It would have been very different if there had been a decision by the parliament to change the tax law, but no such decision has been made."

According to Urwitz, SVCA desires two things in particular: first, that the rules are stable; and second, that the tax rate is on an internationally competitive level. "This is a long process that will take at least five years. It takes a year every time it goes up to a new legal instance," he says.

It looks like Stockholm's court rooms will be filled with private equity players in alternating rounds for the next five to 10 years. The main question is: how will this affect investment levels in the future? Will it, like several in the industry say, dramatically decrease foreign investment, or can Sweden's benefits in other areas make up for it?

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