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Sweden’s highest tax court has issued a ruling that could reshape how profits from international private equity and venture capital funds are taxed, in a move watched closely by investors across Europe.
In a June 19 decision, the Supreme Administrative Court considered a Luxembourg-based fund that was not a legal entity in itself but operated like a Swedish limited partnership. The court ruled that profit-sharing must generally follow the partnership agreement, but added an important caveat: tax authorities can disregard the agreement if the profit split looks unreasonable, tax-driven, or like an improper transfer of income.
At the heart of the case was whether carried interest, the performance-based share of fund profits, and related dividends should be taxed directly in Sweden when paid through foreign companies tied to Swedish individuals. The court said no, finding that the income belonged to the foreign entity that invested in the fund, not the individuals behind it.
Sweden’s Tax Agency, which quickly issued a commentary on the judgment, said the ruling is relevant not only for Luxembourg vehicles but also for funds structured under UK, Guernsey or Jersey law. Each case, however, must be assessed individually.
For the private equity industry, the decision offers both clarity and caution: it confirms that contractual profit allocations will generally be respected, but also underlines that aggressive tax-driven structures will face closer scrutiny.
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