ICECAPITAL Real Estate Private Equity Funds – Clarifying Decision on Taxation of Carried Interest

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We assisted ICECAPITAL’s real estate private equity funds and the owner-entrepreneurs behind them in a long-term tax dispute in which the Finnish Tax Administration sought to tax dividends received by the owner-entrepreneurs as earned income mainly on the grounds that part of the income of the companies took the form of carried interest from the funds.

In decisions issued on 11 May 2021, the Supreme Administrative Court dismissed the Tax Recipients’ Legal Services Unit’s  appeals, which revolved around the disputed legal question of whether carried interest must be deemed capital income in accordance with the civil law form or as earned income subject to withholding tax. The taxpayers’ view was that the only correct interpretation under the regulation in force and the legislative materials is to find that carried interest must also be taxed according to the civil law form as capital income. The Finnish Tax Administration and later the Tax Recipients’ Legal Services Unit had disregarded the civil law form and taken the position that carried interest in particular was earned income subject to withholding tax and possibly constituted tax evasion.

The Helsinki Administrative Court decided the matter to the benefit of the taxpayers in its decision of 12 January 2021. The Helsinki Administrative Court respected the civil law form used and found that carried interest accrued taxable capital income for the entrepreneurs, not earned income. The court also found that the general tax avoidance provision did not apply to the matters.

The Supreme Administrative Court upheld the Helsinki Administrative Court’s decisions, which are now final, and confirmed the taxpayers’ understanding that respect for the civil law form also applies to carried interest. The result corresponds to prior decisions issued by the Administrative Court and the Central Tax Board. The Supreme Administrative Court did not consider the legal question at hand to be sufficiently open to interpretation to necessitate a Supreme Administrative Court hearing.

The result indicates the weight that must be given to the civil law form and further clarifies the legal state surrounding the issue. The decision is significant to the entire private equity investment field. Hopefully this decision along with prior decisions finally closes the long-running debate surrounding the matter. Owner-entrepreneurship must continue to be permitted in the private equity field without significant ambiguity in taxation.