Browsing by Author "Grönberg, Henri"

Carried interest refers to the portion of a private equity fund’s profits allocated to managers of the fund in excess of the capital they have committed. It is a tool used to incentivize fund managers and align their interests with those of capital-providing investors. In the hands of the fund managers, carried interest is often treated as return on an investment even though its nature would suggest that it is compensation for the labour efforts of fund managers. As a result, much debate has arisen in many countries regarding the equitable taxation of carried interest. The purpose of this thesis is to examine the treatment of carried interest for Finnish income tax purposes. The question regarding the taxation in the hands of a fund manager is closely linked to the tax treatment of carried interest within a private equity fund, and thus the tax treatment of carried interest is assessed from the perspective of a fund manager on the one hand, and a Finnish private equity fund, on the other. As no special tax provisions on the tax treatment of carried interest exist in Finnish tax law, its taxation must be determined based on general provisions in tax law. The civil law form in which the carried interest is distributed to a fund manager or its holding company is typically interest, dividend or capital repayment. The carried interest is initially paid by the fund, but in between the fund manager and the fund are typically several entities through which carried interest is channelled to the fund manager. Despite the often-complicated structures in this respect, the question from the view of taxation is, simply put, whether the carried interest should be taxed in the hands of the fund manager following the civil law form of the payment or instead as earned income. In order to address the issue, the general provisions regarding capital and earned income as well as the general anti-abuse provisions must be assessed. The specific nature of carried interest varies in different situations, and thus it should not be categorically taxed as either capital or earned income in the hands of the fund manager. In case law, two published cases exist regarding the tax treatment of carried interest. In both, carried interest was subject to tax in accordance with the civil law form of an arrangement. Nevertheless, arguments for treating carried interest instead as earned income can be presented in certain circumstances. With respect to Finnish private equity funds, the question is to a large extent similar. Because most of the Finnish private equity funds are established in the legal form of a limited partnership, this thesis is limited to addressing the issues in relation to carried interest within a limited partnership. In principle, the payment of carried interest could be regarded as either profit distribution or an expense. In practice, it is often treated as a profit distribution in accordance with the agreement of the partners of the fund. However, at least from an economic perspective, arguments for treating carried interest similarly to a management fee as a deductible expense can be presented. In addition, issues that arise in relation to the allocation of carried interest to different tax years are addressed in this thesis.