Legal Alert – Central Tax Board Respects the Legal Form of Carried Interest Income
Updated, January 2017: The Central Tax Board’s decision has been published by the Tax Administration. The decision has gained legal force.
Tax treatment of carried interest income in private equity fund structures is subject to intense public discussion in Finland. Finnish Tax Administration published a report concerning the taxation of carried interest income in Spring 2016 acknowledging its perception of the classification of carried interest income as earned income. On the other hand, in Finnish published court practice the carried interest income has not been treated as earned income.
We recently handled a case involving this topic as we assisted a Finnish private equity firm in application of an advance ruling. The advance ruling request concerned correct tax treatment of carried interest income to be distributed by the fund in question to its general partner who could further distribute the profit to its shareholders. The structure in question corresponded to a private equity fund structure common in Finland.
In its decision in November 2016 the Central Tax Board confirmed that the carried interest to be distributed by the fund to the general partner must be taxed in accordance with its legal form. In addition, the Central Tax Board declared that taxation of dividends distributed by the general partner to its shareholders must follow their legal form.
The Central Tax Board’s decision will be published by the Tax Administration. The decision is not yet legally binding.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this client alert. Please feel free to contact any of the Borenius attorneys listed in this alert or those with whom you usually work.