Norway: Herkules Capital wins carried interest tax dispute in the Norwegian Supreme Court

Rolf Saastad		Wensing Li

In a ruling from November 12 2015 (Herkules), the Norwegian Supreme Court stated that carried interest for tax purposes is to be treated as operational income in the general partner, rather than income of employment, which was the tax authorities' view. Hence, the tax authorities' view that the carried interest should be treated as personal income taxed at approximately 50% was overruled by the court. The court emphasised that the basis for an assessment of income classification and income allocation for tax purposes is primarily the agreements entered into by the taxpayers, to the extent they reflect the realities and are mutually binding.

Herkules is a private equity fund established under a Jersey LLP structure. The advisory services were provided to the fund by the key individuals through a management agreement with Herkules Capital, a Norwegian company of which those individuals were employed. Both Herkules Capital and the general partner of the fund were 60% indirectly owned by the key individuals through their holding companies, whereas 40% was owned by a private equity sponsor. All profits generated by the fund were split on a pre-agreed fixed basis, with up to 8% of invested capital being paid to ordinary investors and any excess profits being split 80/20 (carried interest) with the general partner.

Although the carried interest were treated as operational income for tax purposes in Herkules, it is unclear whether the classification as such applies to carried interest in general. The classification of carried interest as operational income in this case was agreed by the involved parties in advance of the court hearings. Hence, it was not necessary for the Supreme Court to address this question in particular.

Another important question left open is if there still may be room for argumentation that carried interest should be regarded as income of capital in certain cases where the level of involvement and/or risk-taking are different.

Rolf Saastad (rsaastad@deloitte.no) and Wensing Li (wensli@deloitte.no), Oslo

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