IK Investment Partners hit by carried interest row

Sonnie Ehrendal
06 January 2012

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The Swedish tax authority's battle over carried interest taxation continues as another player is drawn into the feud. Sonnie Ehrendal investigates.

As part of an extensive review of carried interest payments, the Swedish tax authority has decided to retrospectively raise the tax rate for key executives at IK Investment Partners. Executives who previously paid capital gains tax at 25% are to declare the carry as standard taxable income, payable at the highest tier of 56%, and the retrospective payments carry a penalty tax at 40%.

According to Swedish national radio SR, the total amount of retrospective tax demanded from former and current IK partners is close to SEK 1.8bn. The tax authority estimates that partners at IK funds have reserved carry payments in the order of €100m annually between 2005 and 2008.

Reports suggest Björn Savén, previous CEO and current chairman of IK, has been ordered to pay close to SEK 1bn. Furthermore, previous partner Harald Mix, who left IK to co-found Altor in 2003, is allegedly to repay over SEK 200m, despite not having worked for the company in nearly a decade. In a response to the news, Savén resigned from the board of Nordea bank to focus on his work with IK.

According to a tax authority review, the retrospective taxation of partners at IK is a direct result of omitting details about carried interest payments in their income declarations.

The authority says it has secured detailed information about IK's governance and specific carry payments from the Companies Registry at Isle of Man and IK Private Placement Memoranda, but is also believed to have conducted third party audits of Swedish LPs.

In its verdict, the tax authority determines that carried interest is a "profit-related management fee, derived from the degree of success in fund management." Moreover, it argues, "the fee cannot to any extent be regarded as a capital gain, given that IK has not invested any capital."

Just over a year ago, Nordic Capital found itself in the very same position as IK. It then appealed the decision to a higher instance within the tax authority and won a case against taxing carry as standard income. The authority appealed the new decision,but the case has yet to be reviewed.

Jonas Rodny, of the Swedish Private Equity & Venture Capital Association (SVCA), believes the new decision reinforces uncertainty and worries around the conditions of the Swedish PE industry. "This uncertainty will remain until a decision has been reached in the highest legal authority," he adds, and highlights that the SVCA has handed a new tax proposal to the Ministry of Finance.

Rodny sees a risk of GPs moving abroad, thereby distancing themselves from deals and leaving Sweden in the peripheral. "Fair and internationally competitive taxation is essential in order to secure the capital flow that Swedish companies have enjoyed."

Tax officials reportedly have another six PE houses under review. Retrospective taxation of what it deems ‘incorrect details' adds both income and penalty tax to carry. Given the flurry of successful Nordic exits over the last few years, the bills faced by some professionals could be very substantial indeed.

IK Investment Partners was unavailable for comment at the time of publication.