obstacles to nordic venture capital funds 2011.pdf

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NORDIC INNOVATION PUBLICATION 2011:03 // NOVEMBER 2011

Obstacles to Nordic Venture Capital FundsPromoting a common Nordic venture capital market

Updated version 2011


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Obstacles to Nordic Venture Capital Funds Promoting a common Nordic venture capital market Updated version 2011

Authors:Erik Johansson (editor)Peter AlhankoPaulus HidnErna Sif Jnsdttir Janne JuuselaFinn J. LernCarl-Peter Mattsson

Anders MyklebustMartin NilssonSigurd Opedal

Anders Endicott PedersenJyrki ThtinenVala Valtsdttir Nicolai rsted

November 2011

Nordic Innovation Publication 2011:03


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Copyright Nordic Innovation 2011. All rights reserved.This publication includes material protected under copyright law, the copyright for which is held by Nordic Innovationor a third party. Material contained here may not be used for commercial purposes. The contents are the opinion of thewriters concerned and do not represent the official Nordic Innovation position. Nordic Innovation bears no responsibilityfor any possible damage arising from the use of this material. The original source must be mentioned when quoting fromthis publication.

Obstacles to Nordic Venture Capital Funds Promoting a common Nordic venture capital market Updated version 2011

Nordic Innovation Publication 2011:03 Nordic Innovation, Oslo 2011

ISBN 978-82-8277-003-3 (Print)ISBN 978-82-8277-004-0 (URL: http://www.nordicinnovation.org/publications)

Production: Siste Hnd ASCopies: 525

Printed on environmentally friendly paper.This publication can be downloaded free of charge as a pdf-file fromwww.nordicinnovation.org/publications.

Other Nordic Innovation publications are also freely available at the same web address.

Publisher Nordic Innovation, Stensberggata 25, NO-0170 Oslo, Norway

Phone: (+47) 22 61 44 00. Fax: (+47) 22 55 65 56.E-mail: [email protected]

Cover photo: iStockphoto.com


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Project participants

Jyrki Thtinen, Janne Juusela and Paulus Hidn, Attorneys at law Borenius, Finland

Peter Alhanko and Martin Nilsson, Mannheimer Swartling, Sweden

Finn J. Lern, Nicolai rsted and Anders Endicott Pedersen, Plesner Denmark

Sigurd Opedal and Anders Myklebust, Wikborg Rein, Norway

Erna Sif Jnsdttir and Vala Valtsdttir, Deloitte, Iceland

Erik Johansson and Carl-Peter Mattsson, Nordic Investment Solutions, Sweden


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Table of Content1. Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2. Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2.1 Overall Nordic recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2.2 Recommended actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

3. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

3.1 Project background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

3.2 The Nordic legal project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

4. Nordic overview background and problem description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

4.1 Why should policy makers care about venture capital? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.2 The Nordic venture capital market under pressure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

4.3 Overview of obstacles for venture capital funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

4.4 Directive on Alternative Investment Fund Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

5. What do investors look for when it comes to the legal and tax treatment of a venture capital fund? 26

5.1 Present Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

5.2 Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

5.3 Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

6. Obstacles to Swedish based venture capital funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

6.1 Recent developments and present status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

6.2 Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

6.3 Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

6.4 Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

7. Obstacles to Finnish based venture capital funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31


7.2 Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

7.3 Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

7.4 Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

8. Obstacles to Norwegian based venture capital funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38


8.2 Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

8.3 Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

8.4 Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

9. Obstacles to Danish based venture capital funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 9.1 Recent developments and present status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

9.2 Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

9.3 Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

9.4 Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

10. Obstacles to Icelandic based venture capital funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

10.1 R ecent developments and present status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

10.2 Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

10.3 Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

10.4 Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

PROJECT GROUP PARTICIPATING ORGANIZATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Table of abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53


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8 OBSTACLES TO NORDIC VENTURE CAPITAL FUNDS // UPDATED VERSION 2011

1. Executive summary This is a new version of the Obstacles to Nordic Venture Capital Funds report rst publishedin November 2006 and updated in 2007 and 2009. Since publication of the original report,discussions regarding these issues have been ongoing in various forms in the Nordic countries.

Although positive changes have been made in several of the countries, new obstacles indifferent forms have also emerged.

The overall recommendations from the original report are therefore to a large extent still valid

and with the Nordic venture capital market currently under severe pressure, the discussionabout the conditions and regulations for venture capital has become even more important.

The number of venture capital funds in the Nordic region and the amount of capital managed by them have decreased substantially over recent years due to several factors.

A well functioning venture capital market is an important engine for economic growth and thecreation of new industries, companies and employment in the Nordic countries. Furthermore,a venture capital market helps to attract international capital to the region.

Today, these facts has been acknowledged by all the Nordic countries and efforts have beenmade to improve the regulations for the venture capital market in the Nordic countries as wellas on a European level. An important part of the regulations for venture capital relates to legaland taxation issues pertaining to transnational investments into venture capital funds.

There is today broad European consensus that there would be far more cross border investmentin funds if the funds encountered fewer obstacles to cross border capital raising. This is asigni cant problem, especially for smaller growing venture capital funds.

In the Nordic countries there are different kinds of obstacles to venture capital funds receivingtransnational investments. The purpose of this report is to describe the status in each countryand thereby also function as a Nordic best practice study.

In addition to transnational obstacles, other regulations also pose a threat to the market. Inseveral of the Nordic countries the pro t of venture capital rms, often called carried interest,is now being taxed or under the risk of being taxed as salary instead of as capital income. Thisstrongly affects the attractiveness of the venture capital model.

Implications of new EU regulations for the private equity industry, the directive on AlternativeInvestment Fund Managers (AIFM), are also mentioned in the report. These are criticalissues for the progress of the Nordic private equity market and will have to be addressed by allNordic administrations.

The rst part of the report contains overall common Nordic recommendations and providesan overview of the importance of as well as the present status of the Nordic venture capitalmarket. The second part of the report contains detailed updated status reports and nationalrecommendations regarding obstacles in each Nordic country.


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4. The developments relating to the AIFM Directive on the EU level as well as on nationallevel should be carefully monitored to prevent new, potentially signi cant obstaclesarising. The technical and implementation rules are currently being developed andmight still be affected in attempt to suit the needs of the private equity industry as far as

possible. 5. The pro t generated in successful venture capital funds is usually called carried

interest. In several Nordic countries carried interest is now either taxed as or at risk ofbeing taxed as salary instead of capital income. To avoid making venture capital muchless attractive, the legislators should make it clear that carried interest should be taxedas income from capital.

2.2 Recommended actionsThe Project Group recommends the Nordic Council of Ministers to support eachNordic Country to:

1. continue the important work of removing obstacles to Nordic based venture capital funds in order to enhance the conditions of the common Nordic venture capital marketand

2. move from the fact nding and benchmarking phase into that of presenting tangible proposals for the removal of existing obstacles.

The Project Group further recommends the Nordic Council of Ministers to commissionthe Project Group to:

1. continue to function as a Nordic reference group with legal expertise as well as with Nordic coordination and a Nordic market overview,

2. continue to support the efforts to implement changes in each Nordic country, and 3. report back to the Nordic Council of Ministers about the status of each country in

12 months time, to ensure follow up.

3. Introduction 3.1 Project background

The Nordic Council of Ministers has acknowledged the importance of venture capital andcommissioned several projects aimed at promoting a highly functional common Nordic

venture capital market. The removal of cross border obstacles is one of the key objectives.

The present report is a new version of the Obstacles to Nordic Venture Capital Funds report,rst published in November 2006 and updated in 2007 and 2009. It describes the main

obstacles for transnational investments into Nordic venture capital funds.

There are several reasons for considering these issues on a Nordic level. The private venturecapital market has become Nordic and the private venture capital rms often cover severalNordic countries. Thus, there has been an increase in Nordic cross border investments intofunds, which highlights the need to remove the existing obstacles. Cross border investmentsinto these funds from their investor have therefore become more common and made obstacles


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113. INTRODUCTION

for those investments a greater obstacle. Furthermore, by comparing the obstacles, the Nordiccountries can learn from each other, despite the fact that their tax and legal systems differ.

On the European level, the European Commission has taken steps to remove obstacles tothe cross-border provision of venture capital However, these changes on a European level

will however take time and the Nordic countries have an obvious opportunity to create acompetitive advantage by more quickly improve venture capital market regulations. This

would strengthen the Nordic region, making it a potential leader within European venturecapital.

Since the original report was published, several improvements have been made in Iceland,

Sweden and above all in Finland. However, as described in this updated report obstaclesremain in most Nordic countries and new ones have emerged. These obstacles lead to lesscapital investment in promising young Nordic companies that contribute to Nordic innovationand growth.

3.2 The Nordic legal project

After recommendation by a project group of professionals from the Nordic national Ministriesand the market, a Nordic Legal Project was commissioned in the spring of 2006. Thisresulted in the original report as well as the updated versions in 2007 and 2009. In 2011Nordic Innovation, the institution under the Nordic Council of Ministers, commissioned themembers of the Nordic Legal project to revisit the issue in order to describe any changes thatmay have taken place since the last report and to update the overall Nordic recommendations.

The mandate for the project is, as previously, to investigate the main problems encountered byinternational investors who consider investing in Nordic venture capital funds and to suggestsolutions for problems identi ed.

In this new edition the format of the report has been changed. In addition to the joint Nordicrecommendations, the report is divided into two main sections. The rst broadly outlines theimportance of the Nordic venture capital market and the serious challenges it is currentlyfacing as well as the problems resulting from the existing obstacles to international investors.The second describes the actual obstacles in each Nordic country in a more detailed manner.

The Project group includes legal experts from the ve Nordic countries as well as a Nordicprivate equity advisory rm.

Owner of the project:Johan Englund, Nordic Innovation

Coordinators of the project:Erik Johansson and Carl-Peter Mattsson, Nordic Investment Solutions

Members of the Nordic legal project:Jyrki Thtinen, Janne Juusela and Paulus Hidn, Attorneys at law Borenius, FinlandPeter Alhanko and Martin Nilsson, Mannheimer Swartling, SwedenFinn J. Lern, Nicolai rsted and Anders Endicott Pedersen, Plesner Denmark Sigurd Opedal and Anders Myklebust, Wikborg Rein, Norway Erna Sif Jnsdttir and Vala Valtsdttir, Deloitte, IcelandErik Johansson and Carl-Peter Mattsson, Nordic Investment Solutions, Sweden


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As part of their broad efforts within venture capital, Nordic Innovation established a Nordic Venture Capital Forum composed of leading public and private market players in the Nordicand Baltic regions. The Forum functioned as a reference group for various projects as well as anadvisor for potential projects. The input and feedback from the Forum were important duringthe execution of the Nordic Legal project and the Forum functioned as an active referencegroup for the original report published in November 2006 and for its recommendations,

which for the most part remain valid in this updated version.

The members of the Nordic Venture Capital Forum were: Anki Forsberg, Partner HealthCap,SwedenCecilia Gross Friberger, Portfolio Manager, Sixth AP-fund, Sweden

Christian Motzfeldt, CEO Vkstfonden, Denmark Claes de Neergaard, CEO Industrifonden, SwedenPetri Niemi, Senior Partner CapMan, FinlandPeeter Saks, Managing Partner BaltCap, EstoniaTellef Thorleifsson, General Partner Northzone Ventures, Norway Jn Steindr Valdimarsson, Chairman New Business Venture Fond, Iceland

This report describes the updated ndings and suggestions of the Nordic Legal Project and will be presented at the Nordic-European Public Investor Summit on November 24 in Stockholm.

4. Nordic overview background and problemdescription4.1 Why should policy makers care about venture capital?

The importance of a dynamic venture capital industry is to a large extent self-evident. A well

functioning venture capital market, that provides equity nancing to small growing companiesis an important driver of a competitive, entrepreneurial, innovative and dynamic economy.

The venture capital model combines nancing with active ownership and incentives to develop young companies and has produced many successful companies worldwide.

The venture capital market is an important engine for economic growth and the creation ofnew industries, companies and employment in the Nordic countries. Furthermore, it helps toattract international capital to the region.

Today, all the Nordic countries have acknowledged these facts and efforts have been made toimprove the regulations for the venture capital market in the Nordic countries as well as on aEuropean level.

However, the Nordic venture capital market is however under severe pressure, with fewerfunds and less capital to invest in promising companies. This will be described further in moredetail below.


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The graphs below visualize the development of venture capital in the larger Nordic countries in recentyears. The rst graph shows the level of new funds attracted by the venture capital rms and thesecond the level of investments in portfolio companies from the venture capital rms.

Source: Swedish Private Equity & Venture Capital Association

The decline of the private venture capital market has made public investors more importanton the overall market, and also made the public investors make up a larger portion of themarket. For example, in Sweden public investors represented 60% of investments in newportfolio companies in the growth segment.

However, its important to bear in mind that the venture capital market is cyclical and thatsuccessful exits and funds could once again make it more attractive to private investors again.Therefore, favourable regulations are important for the Nordic venture capital market.

Fund raising by Nordic venture capital fundsMEuro

Sweden Norway Finland Denmark

Investments by venture capital firms in the Nordics and EuropeMEuro MEuro

Sweden Norway Finland Denmark Europe (right-axis)


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4 Private Equity Fund Structures in Europe, An EVCA Tax & Legal Committee Special Paper June, 2010

Obstacles can emerge on different levels of the structure. Obstacles can pertain to the foreigninvestors tax situation when investing in the fund, VAT on advisory services, unfavourable taxtreatment of the management share of the pro ts and problems regarding the fund investingin portfolio companies abroad.

In the Nordic region as in Europe today, most venture capital rms operate in severalcountries, which makes the cross-border problems more complex.

The obstacles in the various Nordic countries differ from problems with laws on LimitedPartnerships, to uncertainty on taxes on so called carried interest and problems for investors

from countries without bilateral tax treaties.

Since publication of the original report, discussions regarding these issues have been ongoingin the Nordic countries. Although positive changes have been made in Sweden, Iceland andabove all Finland, obstacles remain in most countries and new obstacles have emerged.

It is worth emphasizing the importance of removing obstacles as well as the need to ensureconsiderate policy making so as not create new ones by changing laws and regulations forother reasons/to avoid creating new ones when laws and regulations are changed for otherreasons.

The European Private Equity and Venture Capital Association (EVCA) have also looked intothe issue of obstacles to venture capital funds. EVCA concluded: Most member states and theirgovernments have some distance to go if their investment environments are to be conduciveto single-market use. 4 Changes on the European level will, however, take time and the Nordiccountries have an opportunity to move more rapidly than their European neighbours to createsuitable conditions for the venture capital market.

The table below presents a comparison of different aspects and obstacles in the Nordiccountries. It is followed by a brief introduction to the obstacles in each Nordic country. A moredetailed description with recommendations can be found in each national section.

At the end of this section the Directive on Alternative Investment Fund Managers from the

European Commission is brie y described. The regulation directive has to be implemented byall countries and coordination on how the directive is interpreted in the Nordic countries is

very important for the market.


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174. NORDIC OVERVIEW BACKGROUND AND PROBLEM DESCRIPTION

Sweden Denmark Finland Norway Iceland

High levelanswer

Yes, but only ifthe investor is acompany in theEU/EEA area and

holds the sharesas a capitalasset.

Yes, however aDanish LimitedPartnership mayin some cases

lose its trans-parency for taxpurposes if amajority of theinvestors for localtax purposestreat the LimitedPartnership as atax subject.

Yes, but only forinvestors residentin tax treatycountries and

assuming theyare tax subjectsunder the treaty.

Yes, with respectto Norwegianportfoliocompanies. No,

with respect toforeign portfoliocompanies,as ownershipin a Norwegianpartnershipcreates atax liability toNorway.

Income deriving from shareholding inIceland is regarded as taxable incomein Iceland, and as such taxed in Iceland.However, if a Tax treaty states that the

relevant income is only to be taxedin the home country of the investor,the investor has to apply for a specialexemption from taxation.

Obstacle Investors outsidethe EU/EEA areaor investors thathold the sharesas a tradingasset (whichincludes banksand insurancecompanies) aretaxed in Sweden.

None. Investors fromother than taxtreaty countriesor investorsfrom tax treatycountries that arenot tax subjectsunder the treatycould be treatedas having apermanentestablishment inFinland.

Investors outsideNorway maybe subject to ahigher tax anda tax reportingobligation.

It is up to the relevant tax treaty if theincome deriving from shareholding ininvestment funds is taxed in Iceland. Ifit is not taxed in Iceland, investors haveto apply for a special exemption on thegrounds of authorization in a tax treaty.

Effect It is difficult tohave a Swedishstructure withnon-Swedishinvestors.

None. Difficulties toattract non-qualifyinginvestors, inparticular funds offunds, to Finnishfunds.

Difficult to setup Norwegianstructures whereforeign investorsare invited.

May hinder investors from countries thatdo not have a tax treaty with Iceland.The need to file for an exemption basedon a tax treaty may also be a hindrance.Noncompliance can lead to the investorsbeing subject to taxation according toIcelandic tax legislation. Taxes paidin these instances can be refunded ifan application is submitted to the taxauthorities.

Recomm-endation

Swedish lawshould bechanged sothat investors intax transparentpartnerships arealways taxedas if they hadowned the sharesdirectly.

None. Finnishexemption shouldbe extended tonon-tax treatyinvestors and e.g.fund of funds.

Norwegianlaw should bechanged to havefull transparencyfor partnerships.

We recommend that Iceland concludestax treaties with more countries. Wealso recommend that the procedureof submitting a special application forexemption according to authorization ina tax treaty should be abolished.

Comparison table of obstacles to Nordic venture capital funds

1. Are institutional investors in a fund taxed in the same way as if they had owned theshares directly?


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High levelanswer

Yes, carriedinterest should betaxed as capitalincome at 25%.

Since 2010carried interesthas been taxedas salary income,provided that thefund partner is

a tax resident ofDenmark.

Carried interestmay bestructured asbusiness incomeof a corporateentity and taxed

at corporateincome tax rate.

Yes. Yes, carried interests are taxed ascapital income. If the receiver is anindividual the income is taxed at the20% rate. If a company (non resident),then taxed at the 18% rate, (20% ifresident) - hence the income is taxed as

capital gains, not as salaries. (Accordingto a proposed bill before the Icelandicparliament, the tax for individuals andcompanies may be reduced to 10%).

Obstacle The SwedishTax Agency hasrecently takenthe position thatcarried interestshould be taxedas salary at~57% + socialsecurity fees at31.42%.

The applicablesalary tax rateis up to 56 %compared tocapital incometaxation at 42 %.

(Taxation ofcarried interestreceived by thepartners directlyremains unclear.However, Finnishstructures donot typicallydistribute carriedinterest directly toindividuals.)

The taxationwill depend onwhether themanagementholds sufficientownership in thefund, to which thecarried interestcan be referredto.

None.

Effect If the Tax Agencyis right, there is aconsiderable riskthat the privateequity industrywill be forced tomove to othercountries.

Private equityfund partnerswho are taxresident inDenmark havean (additional)incentive to leaveDenmark.

None. If no, or onlyinsignificantownership, thecarried interestwill be taxedas salary, withthe effect thatmanagementmust move out ofNorway.

None.

Recomm-endation

Swedish lawshould bechanged so that itis confirmed thatcarried interest istaxed as capitalincome.

The Danishtaxation ofcarried interestis out of line withthe legislationin the otherNordic countries- and the EUmember states- and should bechanged.

None. No clear answertoday. Thisshould be furtherclarified by lawor statementsfrom the taxauthorities.

None.

2. Is the fund managers part of the pro t, the so called carried interest, received by the partners of the fund manager taxed as capital income?


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3. Is the advisory fee subject to VAT?


High levelanswer

Yes, at 25%. No, themanagementservices willmost likely beconsidered a VATexempt financial

service.

No. No, provided itis considered afinancial service.

Yes, at 25,5%.

Obstacle Advisory servicesrendered to aSwedish fundare 25% moreexpensive thatservices renderedto e.g. a Jerseyor Cayman fund.

None. Lack of guidanceand publishedcourt casesconcerningthe conceptof financingservices.

The term"financial service"is unclear, andsome of theadvisory fee mayfall outside theexemption andbe subject to25 % VAT.

Advisory services rendered to anIcelandic fund are 25,5% moreexpensive than services rendered to e.g.a Jersey or Cayman fund

Effect It is lessadvantageousto establish aSwedish fundstructre.

None. Some uncertaintyamong fundsconcerning someservices relatingto funds.

It is lessadvantageousto establish aNorwegian fundand management

structure.

Less advantageous to establish anIcelandic based fund.

Recomm-endation

Swedish lawshould bechanged sothat investmentadvice renderedto private equityfunds are VATexempt.

None. VAT treatmentcould be clarifiedby legislation oradministrativeguidance.

Norwegianlaw should bechanged sothat investmentadvice renderedto private equityfunds are fullyVAT exempt.

The Icelandic VAT law should bechanged so that service rendered toIceland based funds (inside Iceland) isVAT exempt.


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4. Are investments in local portfolio companies taxed differently just because the owner isa private equity fund?

SwedenSwedish partnerships can starting from 1 January 2010 indirectly bene t from the tax-free treatment under Swedens rules on participation exemption. This means that Swedishlimited partnerships are now able to receive capital gains and dividends tax free as long as thecapital gains and dividends would have been tax free if they had been received by the investordirectly. This has opened up possibilities to organize private equity funds as Swedish limitedpartnerships (Sw. kommanditbolag) instead of limited liability companies (Sw. aktiebolag).

The changes in relation to the enlarged applicability of the participation exemption rules tolimited partnerships are positive but will not alone suf ce to revitalize the Swedish venturecapital industry.

From an overall industry perspective, recent years have been very tough for the Swedish venture capital industry. As compared to a decade ago, there are very few Swedish basedprivate funds that are making investments in early stage opportunities. The reason for theshortage of capital is that a great number of the private funds that have been active in theSwedish venture capital market for many years have not succeeded in raising successor funds.

A few years ago, the Swedish Tax Agency launched a project with the aim of scrutinizing theSwedish private equity industry. During the last years, it has become clear that the SwedishTax Agencys main focus is on the taxation of carried interest. Carried interest refers tothe pro ts generated in a successful private equity fund that are usually received by themanagement of the fund, and which typically amount to 20% of the net pro ts in the fundprovided that certain thresholds are met. Up till recently, it has been commonly believedthat carried interest should be taxed as income from capital, just as any other income from


High levelanswer

No. No. Yes, in certainsituations

No. No.

Obstacle None. None. A private equityinvestor is subjectto tax on capitalgains on shareswhile an industrialinvestor may benefitfrom participationexemption if theinvestment is madedirectly to the targetcompany.

None. None.

Effect None. None. Private equity fundsare less attractive tocertain investors.

None. None.

Recomm-endation

None. None. Participationexemption on capitalgains should beextended to privateequity funds.

None. None.


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investments. The Tax Agency has, however, taken the position that carried interest should betaxed as employment income, arguing that carried interest is not a split of pro ts since it isusually not received pro rata to the invested capital but a compensation for services rendered

by the management team of the fund.

The collective opinion in the community of tax lawyers and scholars is that the Tax Agencysposition is wrong and that it lacks legal support and it is now a question for the Swedish taxcourts to decide on. Until then, the uncertainty following from the Tax Agencys position willlikely negatively affect the entire Swedish private equity industry.

The Swedish member of the project, Mannheimer Swartling, states that it seems to be generally

acknowledged that the government must take measures to actively support the Swedish venture capital market. Apart from increasing the effectiveness of the governmental nancingto newly started and growing companies and the establishment of a fund-of-funds that shallinvest in Swedish venture capital funds, it should also be considered to remove certain taxesapplicable both to the fund entities and their investors that are harmful for the revitalizationof the industry. It is important to combine all these different measures so that companies in allstages of their lifecycles can obtain the necessary nancing for their developments.

In order not to risk paralyzing the entire Swedish private equity industry for many years giventhe uncertainty regarding taxation of carried interest, the legislator should make it clear thatcarried interest should be taxed as income from capital.

FinlandBoth legal and tax legislation applicable to Finnish venture capital funds can be regarded assatisfactory for the most part. From a legal point of view, Finnish limited partnerships aregenerally speaking suitable for venture capital activities, as there e.g. are no restrictions on howpro ts can be allocated among and distributed to the partners or on how the business of thelimited partnership is organized. The limited partnership form also offers the exibility thatneeded in venture capital activities. However, the legislation is mostly general and not alwaysoptimally suitable for the speci c features of the venture capital business, or in part leavingcertain issues as a matter of interpretation. This means that in practice fund documentationmay need to address certain considerations resulting from mandatory provisions of law in a

way that is less than ideal, but the Finnish Partnerships Act does not set any hard obstacles for

using a partnership as a fund vehicle.

However, some issues still remain obstacles particularly in relation to taxation. Applicationof the tax regulations to venture capital funds and especially to non-Finnish investors haspresented certain open issues.

After the Income Tax Act amendment entered in force in 2006, a Finnish limited partnershipcarrying on venture capital investment activities no longer constituted a permanentestablishment for investors resident in tax treaty countries (assuming they are tax subjectsunder the treaty), and also foreign investors began to participate in Finnish funds. Althoughit was previously thought that international investors often just lack trust in Finnish fundstructures, recent developments indicate that this may not be necessarily the case.

Obtaining optimal tax treatment still requires some administrative work by the fund and insome cases legal assistance. The important issues remaining include the fact that the changes


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made in 2006 only apply to investors from a tax treaty country and only provided that suchinvestors are tax subjects under the treaty. For some funds of funds (which, even if organisedin a tax treaty jurisdiction, may not be tax treaty subjects), this may constitute an obstacle forinvesting in a Finnish fund, or at least require investing through holding structures. The taxtreatment discriminates investments through Finnish funds as the capital gains from sharesin portfolio companies would not be taxable in Finland if the investor makes the investmentsdirectly (or through a foreign fund) to portfolio companies.

Although in practice management fees from funds have not been subject to VAT, ideally this would be more clearly con rmed in tax laws and praxis.

In addition, tax considerations pose an obstacle for investments by charitable associations in venture capital funds and in non-listed companies.

Although the remaining obstacles to venture capital funds have been acknowledged in publicdiscussions, no concrete actions towards eliminating them have taken place in Finland.

NorwayUnder Norwegian corporate law there are, in practice, three available structures for a venturecapital fund. The fund can be incorporated as either a private limited liability company(Nw: aksjeselskap (AS) ), a limited partnership (Nw: kommandittselskap (KS) ) or a silentpartnership (Nw: indre selskap (IS) ), of which the silent partnership has the most similarities

with an offshore limited partnership, and is therefore the preferred Norwegian structure (bothIS and KS are hereinafter referred to as limited partnerships).

According to Norwegian tax law, limited partnerships are tax transparent entities, as opposedto limited liability companies which are taxed at company level. The tax exemption under theparticipation exemption provides, as a starting point, a relatively investor-friendly tax regime,

both with respect to fund level and portfolio level taxation.

When the fund vehicle is a limited partnership, it is assumed that the limited partnership will most likely be deemed to constitute a Permanent Establishment for foreign investors. As a result, foreign investors in a Norwegian limited partnership become liable for tax toNorway on the income of the limited partnership, according to internal tax law. However, the

Norwegian participation exemption will, under the current regime, in many cases effectivelyexempt foreign investors from Norwegian taxation. Foreign corporate investors are obligedto le tax returns with the Norwegian tax authorities as a result of their investments in aNorwegian limited partnership.

Even though there is limited taxation due to the participation exemption, the ling obligationand the perception of the Norwegian tax regime as being unpredictable in certain sectors areconsidered obstacles for foreign investors when considering investing in Norwegian limitedpartnerships. Although not creating a Permanent Establishment, Norwegian limited liabilitycompanies are subjected to more cumbersome distribution regulations which in themselvesare considered an obstacle.

As a consequence, most venture capital funds initiated by Norwegian venture capital rms, withthe aim of attracting foreign investors, are organized as tax transparent limited partnerships


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in foreign offshore jurisdictions, in particular the Channel Islands. These jurisdictions aregenerally internationally-accepted and thus, preferred by international investors. However, ifthe targeted investor base is purely Norwegian entities, a Norwegian structure is more likelyto be chosen.

Financial services, as de ned in the Norwegian Trading Securities Act, are exempted from VAT. Services rendered by a management company to a venture capital fund in a typicalstructure are, in relation to VAT, deemed as nancial services provided that such servicesrelate to genuine investment activities. Services that are not connected with the investmentactivities, such as typical funds administration services, are not comprised by the exemptionand are consequently subject to VAT. In practice, the determination of whether or not a

service should be subject to VAT is in certain cases proving to be dif cult, and is subject toan increased focus by the tax authorities. These uncertainties should be avoided by a moreprecise exemption from VAT for management companies of venture capital funds.

The taxation of the managements carried interest has, to some extent, been uncertain inNorway. However, it is normally assumed that as long as the carried interest is based on anownership in the fund, it should be considered as a capital gain. However, there is no clearrule of thumb on how large the ownership should be in order for the whole carried interest to

be considered as a capital gain.

The Norwegian member of the project, Wikborg Rein, recommends that it is clari ed, eitherin Norwegian law or by the Norwegian tax authorities, that foreign investors investment ina limited partnership is not deemed as a permanent establishment and that the corporatelegislation is amended to be as exible with regard to distribution in and out of the fund

vehicle as in competing offshore jurisdictions. Furthermore, it is recommended to abolish the3 % tax (effectively 0.84%) on dividends for corporate entities.

Wikborg Rein further recommends that the NVCA continues its close dialogue with Norwegianpolitical and regulatory authorities in the process of translating and implementing the AIFMdirective. It is important to focus on ensuring that the implementation of the AIFM directiveis in line with that of the other European countries and in particular the Nordic countries.

We further recommend that the Norwegian authorities enter into co-operation agreements with regulators in recognized offshore jurisdictions outside the EU (for example Guernsey and

Jersey) to enable funds based in these jurisdictions to be marketed in Norway.

DenmarkDenmark has so far been the Nordic country with the least obstacles for venture capital funds.Danish Limited Partnerships (kommanditselskaber) can be used as vehicles for venturecapital funds, since neither Danish nor foreign investors will be taxed on the income derivedfrom the Limited Partnership in Denmark. The Danish Limited Partnership structure is also

very similar to the structure that foreign investors are used to from Anglo-Saxon based funds, which further implies that the legal documentation is normally drafted along the same linesas the Anglo-Saxon funds and thereby known by foreign investors.

In the past couple of years, certain negative developments have, however, surfaced. TheDanish government has introduced salary taxation of carried interest paid to fund partners.Obviously this will not help Denmark attract and retain the best fund partners.


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Additionally, in recent years the Danish tax authorities have launched an attack on dividendand interest payments to, primarily, foreign holding companies owned by private equity funds- claiming that the holding companies are not the bene cial owners of the payments and thusthe Danish paying companies should have withheld taxes on such payments.

These cases have contributed to legal uncertainty for cross-border investments into Denmark,especially with respect to the private equity business, since they, in many structures, effectivelyprohibit shareholder loans into Denmark as well as it making exits, recaps and other cash withdrawals very dif cult.

However, the conclusion still remains that no major legal issues are impeding foreign investors

from investing in private equity/venture capital funds in Denmark, but the conditions have become less attractive for the fund partners .

Additionally, Plesner recommends for example that the Danish tax authorities explain theadministrative tax practice more explicitly and set it out in the Tax Assessment Guidelines toavoid uncertainty.

IcelandDuring recent years, Icelandic partnership legislation has undergone substantial improvement.The concept of Public Limited Partnerships (PLP) was introduced in 2006 and the Partnershipact in 2007.

It should be noted that despite the lack of a dedicated partnership act, partnership has been anaccepted form of business in Iceland for many years. The reason for the implementation of thePLP structure was to provide an appropriate option suitable for investment funds that couldattract local and foreign investors as well as facilitate their cooperation.

Substantial changes have been made to the Icelandic tax law and the government has indicatedthat more will be forthcoming. At present, no information is available as to whether will besystematic changes or just increases in tax rates. These changes might result in higher taxationon companies.

The Icelandic member Deloitte recommends that full emphasis be placed on the stability of

the Icelandic tax regime so as to attract foreign investors to invest in Icelandic venture capitalfunds. Corporate income tax and tax on capital gains have been raised considerably over thepast two years, making Icelandic venture capital funds less attractive for foreign investors.

Deloitte further recommend that transparency of the Icelandic tax system be focused upon, with the full cooperation of the Icelandic tax authorities. In particular, access to bindingrulings could be improved. It is also important that more conventions for the avoidance ofdouble taxation are concluded.

Despite the above-mentioned short-comings, Icelandic tax law is presently not considered anobstacle to the establishment of venture capital funds in Iceland


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4.4 Directive on Alternative Investment Fund Managers

On 27 May 2011 the Council of the European Union (the Council) adopted the directive on Alternative Investment Fund Managers (AIFM). The main features of the AIFM directiveare authorization requirements for AIFMs, regulation of marketing and third countryprovisions, depositary requirements, remuneration policies requirements, general principlesfor conducting the AIFMs business activities and reporting/disclosure requirements relatingto capital, valuation, use of leverage and asset stripping provisions.

The AIFM directive entered into force on 21 July 2011, and the member states (includingNorway through the EEA agreement) have to implement the Directive in national law by

22 July 2013. Today the full effect of certain elements of the directive remains unclear. It isexpected that the full effect of the directive will become clearer during the implementationprocess, where the European Commission and the European Securities and Markets Authority(ESMA, formerly CESR) will have a leading role. In November 2011, ESMA is to publish itsadvice to the European Commission on the Level 2 provisions.

The AIFM directive encompasses managers of all funds, which are not UCITS funds, including venture capital funds, save for certain smaller funds, namely funds with managed assets below: (i) 100 Million EUR (for leveraged funds) or (ii) 500 Million EUR (if the fund itself isnot leveraged, which is the case for most venture capital funds, and has no redemption rightsin the ve year period following the constitution of fund).

In order to strengthen venture capital funds competitive position in terms of access to sourcesof funding, the European Commission launched on 15 June 2011 a consultation on specialrules for venture capital funds, which considers a voluntary regime for managers of venturecapital funds where such managers may register for an EU-wide marketing passport whilstonly being required to comply with certain provisions of the AIFM directive. The new regimeis proposed to apply only to venture capital funds, i.e. buy-out funds will be regulated by the

AIFM directive.

We recommend that the respective Nordic venture capital associations conduct a close dialogue with political and regulatory authorities in the process of translating and implementing the AIFM directive. It is important to focus on ensuring that the implementation of the AIFM

directive is aligned among the Nordic countries and in line with that of the other Europeancountries. We further recommend that the Nordic authorities enter into co-operationagreements with regulators in recognized offshore jurisdictions outside the EU (for exampleGuernsey and Jersey) to enable funds based in these jurisdictions to be marketed in the Nordiccountries without any unnecessary burden that might restrict the number of funds availablefor Nordic investors.


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5. What do investors lookfor in terms of legal and taxtreatment of a venturecapital fund? 5.1 Present statusThe majority venture capital funds that make investments predominantly in the Nordic regiondo not operate out of the Nordic countries. As stated above, some Nordic countries have todayno structures that can compete successfully with foreign fund structures as they lack eitherof two important criteria for venture capital funds, namely favorable tax treatment and trust.

5.2 Legal

From a legal point of view, investors expect a private equity fund to be structured in sucha way that there are basically no restrictions on (i) how pro ts can be allocated among andimmediately distributed to the partners, or (ii) how the business of the limited partnershipis organized. The freedom to create tailor made solutions has thus over a very long period,generated a general feeling of trust in the limited partnership structure as the only appropriate

vehicle for venture capital funds, among both investors and management teams.

5.3 Tax

From a tax standpoint, investors in a venture capital fund expect that a venture capital fundshould have the following characteristics:

The fund should be fully tax transparent. This means that no income tax should beimposed in the country where the fund is established or where the management

carries on the investment activities. Tax, if any, should only be paid in the countryin which the investor is based. Tax transparency has two main advantages for aninvestor: Firstly, the investor only has to consider the tax laws in his/her own country.

Secondly, many investors, such as pension funds, are tax exempt, which in the case of full tax transparency means that they neither pay tax in the country where the fundis established and/or carries on its business (because it is tax transparent), nor in thecountry where the investor is based (because the investor is tax exempt). If the funddoes not meet this criterion, it involves additional costs compared to direct investments,which are often not feasible, practical or possible.

No VAT should be imposed on managements services to the fund. The fund pays amanagement fee to the company that manages the fund. As a general rule, all suppliesof goods and services, such as management services, are subject to VAT. Since venturecapital funds are generally not registered for VAT (as they do not carry on any activitiessubject to VAT), any VAT charged on the management fee will be non-recoverable. Thismeans that any VAT paid on the management fee may be an additional cost that in theend will be paid either by the investors or the management team.

Absence of other signi cant taxes or charges such as transfer, stamp or wealth taxes.


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276. OBSTACLES TO SWEDISH BASED VENTURE CAPITAL FUNDS

6. Obstacles to Swedish based venture capital funds

6.1 Recent developments and present status

6.1.1 Recent developmentsFrom an overall perspective, recent years have been very tough for the Swedish venture capital

industry. Compared to a decade ago, there are very few Swedish-based private funds makinginvestments in early stage opportunities. The reason for the shortage of capital is that a greatnumber of the private funds that have been active in the Swedish venture capital market formany years have not succeeded in raising successor funds.

The lack of capital in the venture capital segment and the negative effects thereof haverecently been acknowledged by the Swedish Government. In the budget proposal presented tothe Swedish Parliament in September 2011, the Government took an initiative to restructurethe different public entities that currently provide funds to primarily early stage but also laterstage investments. The aim of the restructuring is to make the Governments involvement inthe industry more visible and effective. Further details of the proposal will be presented in2012. The Government is also investigating the possibility of establishing a fund-of-funds forinvestment in Swedish venture capital funds in parallel with private institutions.

In relation to the effectiveness of Swedish fund structures, since 1 st January 2010 Swedishpartnerships can indirectly bene t from Swedens rules on participation tax exemption. Thismeans that Swedish limited partnerships are now able to receive tax free capital gains anddividends as long as these would have been tax free had they been directly received by theinvestor. This has opened up possibilities to organize private equity funds as Swedish limitedpartnerships (Sw. kommanditbolag) instead of limited liability companies (Sw. aktiebolag).The changes in relation to the greater applicability of the participation exemption rules tolimited partnerships are positive but will not alone suf ce to revitalize the Swedish venturecapital industry.

A few years ago, the Swedish Tax Agency launched a project with the aim of scrutinizing theSwedish private equity industry. During recent years, it has become clear that the Swedish Tax Agencys main focus is on the taxation of carried interest. Carried interest refers to the pro tsgenerated in a successful private equity fund that are usually received by the management ofthe fund and which typically amount to 20% of the net pro ts in the fund provided that certainthresholds are met. Until recently, it was commonly believed that carried interest should betaxed as income from capital, in the same way as any other income from investments. The Tax

Agency has, however, taken the position that carried interest should be taxed as employmentincome, arguing that it is not a split of pro ts since it is usually not received pro rata to theinvested capital but a compensation for services rendered by the management team of thefund. The collective opinion of the community of tax lawyers and scholars is that the Tax

Agencys position is wrong and lacks legal support, thus it is now a question for the Swedishtax courts to decide . Until then, the uncertainty due to from the Tax Agencys position is likelyto negatively affect the entire Swedish private equity industry.


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6.1.2 Present statusThe Swedish venture capital industry is currently facing considerable problems. Few Swedishinstitutional investors are prepared to invest in Swedish based venture capital funds and manyfunds that have operated on the Swedish market for many years hold portfolios that requirea longer time than expected before they are ready to be exited. Several funds experience a

vicious circle where they have to show successful developments and divestments of theirportfolio companies before they will have a chance to establish successor funds and thereby

be able to make investments in new opportunities.

Swedish limited liability companies are no longer the only Swedish-based entities that can beused as fund vehicles in Sweden. Since 2010, Swedish limited partnerships can be structured

so that in most situations investors can avoid taxation, similar to the tax environment forSwedish limited liability companies. A main bene t of a partnership compared to a limitedliability company is that there are basically no restrictions to withdraw funds from a limitedpartnership to its investors. In comparison, a limited liability company in which investorsinvest in shares or other equity based instruments has to comply with the statutory restrictionson value transfers that may delay payments from the fund to its investors.

Swedish limited liability companies have been used for the purpose of establishing buy-out,debt and real property funds and in some instances in venture capital funds. While we haverecently seen buy-out, debt and real property funds being established in the form of Swedishlimited liability companies, the establishment of venture capital funds based on Swedishstructures does not seem to be as common. Despite the fact that Swedish-based structureshave become more frequent and attracted foreign investors, especially in the buy-out and realestate segments, it is still fair to say that most foreign investors remain unwilling or unableto invest in structures other than non-Swedish limited partnerships. Consequently, venturecapital funds of some size having Sweden or the Nordic countries as their home market havein reality been compelled to go abroad and use foreign limited partnership structures that areacceptable by both their domestic and foreign investors.

The Swedish Tax Agency has taken the position that carried interest should be taxed asemployment income. Top date the Agency has mainly focused on larger buy-out funds but hasnow begun auditing venture capital funds. In general, the tax issues are similar irrespectiveof where the fund is established or the type of investment. The Tax Agencys position is likely

to negatively affect the entire Swedish private equity industry and a nal decision from theSwedish tax courts will probably take several years.

6.2 Recommendation

It seems to be generally acknowledged that the government must take measures to activelysupport the Swedish venture capital market. Apart from increasing the effectiveness of thegovernmental nancing to newly started and growing companies and the establishment of afund-of-funds to invest in Swedish venture capital funds, consideration should also be givento the elimination of certain taxes applicable both to the fund entities and to their investors ,

which impede the revitalization of the industry. It is important to combine all these differentmeasures so that companies in all lifecycle stages can obtain the necessary nancing for theirdevelopment.


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296. OBSTACLES TO SWEDISH BASED VENTURE CAPITAL FUNDS

Although participation exemption applies where shares are held through limited partnerships, venture capital funds organised as Swedish limited partnerships should preferably be trulyand fully tax transparent. This means that no income tax should be imposed in Sweden, even ifthe management carries on the investment activities in Sweden. The guiding principle should

be that investors are only taxed in their home countries, not in Sweden. Sweden should lookthrough the venture capital vehicle and identify the end investor to ensure that tax is onlyapplied only in the latters home state.

When a Swedish management team manages a fund in another Nordic country, its activitiesshould generally not not lead to the fund being considered a taxable permanent establishmentin Sweden.

In cases where a Swedish management team manages a fund in Sweden, its services shouldalways be exempt from VAT, not only when the management company is also the generalpartner of the fund.

In order to avoid the risk of paralyzing the entire Swedish private equity industry for many years due to uncertainty regarding the taxation of carried interest, the legislator should clarifythat carried interest should be taxed as income from capital.

6.3 Legal

In Swedish law there are no signi cant restrictions that would prevent Swedish or foreigninvestors from investing in Swedish limited partnerships. Swedish law contains only a fewprovisions relating to limited partnerships, and basically all statutory provisions that concernthe relationship between the partners can be set aside by agreement. The few provisions thatconcern the relationship between the limited partnership and third parties do not constitutean obstacle to a exible fund structure.

With regard to Swedish limited liability companies, investors can be offered the possibilityto invest in the fund by means of either equity (in particular preference shares in additionto shareholder contributions) and shareholder loans with xed interest or participatingdebentures. Due to the exibility in creating tailor-made capital structures, investors do notgenerally have to pay tax in Sweden irrespective of their country of origin.

6.4 Tax

6.4.1 Income taxThe income of a Swedish limited partnership is presently taxed as follows. First, the taxableincome is calculated at partnership level as if the partnership was a taxable entity (which it isnot). The taxable income thus calculated is then taxed in Sweden in the hands of the investors.The reason why the investors are taxed in Sweden even if they are resident abroad is that theincome is considered to be derived from a permanent establishment in Sweden because thefund management conducts its investment activities in there.

However, as mentioned above, since 1 January 2010, it is possible for partnerships held bycompanies to receive tax exempt share dividends on shares if the dividends would have beenexempt had the company that holds the partnership have received the dividends directly. The


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same rule applies to capital gains on shares held by partnerships. This is an improvement, as ithas opened up the possibility to organize private equity funds as Swedish limited partnerships.For many foreign investors in a partnership, this also solves the permanent establishmentissue, as income considered derived from a permanent establishment is not an issue as longas the permanent establishment only generates income that is tax exempt in accordance withparticipation exemption.

However, participation exemption only applies with respect to foreign companies that areequivalent to certain Swedish legal entities and that domiciled within the EEA. Furthermore,the participation exemption rules are only applicable provided that the shares, had they beenheld by the foreign investor directly, would have been regarded as capital assets. As many

private equity investors are established in countries outside the EEA and as an importantinvestor category is comprised of institutional investors such as pension funds, insurancecompanies and large foundations, these requirements may not always be met. Such investorsthus have to pay tax in Sweden on income from the fund, even if they are tax exempt in thecountry where they are established. Generally, it should be acceptable from a Swedish taxpolicy standpoint to extend any tax exemption to investors outside the EEA, even if the sharesare regarded as trading assets and irrespective of the investors legal form.

With regard to the issue of taxation of carried interest mentioned under 6.1.1 it is vitalthat anybody who today establishes a new fund is aware of the potential tax issues andthe uncertainty surrounding them. Different structures have differing advantages anddisadvantages but the current tax environment makes it extremely dif cult to provide anyadvice on which structures that still function well.

6.4.2 VATIn Swedish case law, services rendered by the management company (i.e. the general partner)to the fund are not considered to constitute supply for VAT purposes if they fall within thescope of the limited partnership agreement. Therefore, no VAT is paid on management feescharged to Swedish venture capital funds. Consequently, VAT is not an obstacle to Swedish

venture capital funds today .

However, where a Swedish management team manages or gives advice to a fund in anotherNordic country, the services are subject to 25% VAT in Sweden unless the entity that buys the

services has a business subject to VAT (which is usually not the case in a traditional privateequity set up). Therefore, Swedish VAT is often an issue when the management company is notthe general partner of the fund. To solve this problem, Sweden should exempt managementservices rendered to private equity funds from VAT.

6.4.3 Other taxesSweden does not impose any other signi cant taxes or other charges on the activities of aSwedish venture capital fund. Consequently, other taxes or charges are presently not anobstacle to Swedish venture capital funds.


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317. OBSTACLES TO FINNISH BASED VENTURE CAPITAL FUNDS

7. Obstacles to Finnish based venture capital funds

7.1 Recent developments and present status

7.1.1 Recent developments Although the obstacles to venture capital funds have been acknowledged in public discussions,

no concrete actions to remove them have taken place in Finland. No tax initiatives directedto venture capital investments were introduced in the programme of the new governmentin June 2011. Inter alia, the proposal for extending the current tax exemption in Section 9.5of the Finnish Income Tax Act to cover also investments from non-tax treaty countries andinvestors in funds of funds has still not progressed. Similarly, the proposal to allow charitableorganisations to make tax-exempt investments in venture capital funds and non-listedcompanies (as tax exemption only currently concerns investments in listed companies) is stillunder discussion. The possibility of using a Finnish advisory company has been proposed to

be improved by eliminating the risk of constituting a permanent establishment in taxation of aforeign fund or its investors. Also the mutual recognition of fund structures and the eliminationof PE risks concerning a Finnish fund investing in foreign target assets are intended to beadvanced in the future. However, it should be noted that no actual changes in legislation have

yet occurred, and it is not even clear whether the planned actions will be realized as proposed.

Nevertheless, new case law has evolved regarding the taxation of venture capital funds. TheSupreme Administrative Court has published court cases concerning the interpretation of

when a limited liability company may be deemed as carrying on venture capital activities.The question has signi cance for structuring venture capital investments in Finnish targetsas well as for deciding upon a feasible exit structure, as companies classi ed as venturecapital companies are not allowed to utilize the general tax exemption in respect of sharesales (participation exemption). This issue also plays a role when combining the activitiesof different companies within the target group. In the published court cases, the Supreme

Administrative Court focused on the purpose of the acquiring company in the fund structure

and its role in the business activities of the target company.

After the implementation of the MiFID, the Finnish Financial Supervision Authority (FIN-FSA) issued an interpretation regarding the impact of MiFID on advisory relationships

between private equity funds and their managers/advisors, as provision of investmentadvice basically requires authorisation by the FIN-FSA. The interpretation seems to haveclari ed the situation in most cases (i.e. provision of advisory services within the same groupof companies does not require authorisation), although additional and more detailed guidanceon special circumstances could still be neccessary in some cases.

Previously, certain amendments were enacted in the Finnish Mutual Funds Act and theInvestment Firms Act, which changes could basically enable a special mutual fund (a Finnishnon-UCITS fund) to invest in closed-end funds. A mutual fund could in theory be used as afeeder fund or as an evergreen fund of funds. There are, however, a number of restrictionsthat will still need to be considered, and the use of mutual funds as a new type of fund-raising


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vehicle also depends on what kind of mutual fund rules will be approved by the FinnishFinancial Supervision Authority. In this respect, we have not seen any actual changes orprogress in the legal environment or in practice.

The AIFM directive contains several new obligations that are also generally applicable tomanagers of venture capital funds. Depending on the EU legislative process and on nationalimplementation, the Directive will most likely signi cantly affect also the Finnish practices.

At this stage it is impossible to estimate the actual effect of the Directive on the position ofFinnish venture capital funds and fund managers, but it is fairly clear that the industry (or atleast some of the management companies) will be burdened by various new non-desirablerequirements.

7.1.2 Present statusBoth legal and tax legislation applicable to Finnish venture capital funds can be regarded assatisfactory for the most part. From a legal point of view, Finnish limited partnerships aregenerally speaking suitable for venture capital activities, e.g. since there are no restrictions onhow pro ts can be allocated among and distributed to partners or to how the business of thelimited partnership is organized (however, see 7.3 for further details). The limited partnershipform offers the exibility needed for venture capital activities.

However the legislation is mostly general and not always optimally suitable for the speci cfeatures of the venture capital business, or in part leaving certain issues as a matter ofinterpretation. This means that in practice fund documentation may need to address certainconsiderations resulting from mandatory provisions of law in a way that is less than ideal, butthe Finnish Partnerships Act does not set any hard obstacles for using a partnership as a fund

vehicle (see section 7.3 for some key factors).

However, some issues still remain obstacles particularly in relation to taxation. After theIncome Tax Act was amended in 2006, a Finnish limited partnership carrying on venture capitalinvestment activities no longer constituted a permanent establishment for investors residentin tax treaty countries (assuming they are tax subject under the treaty), foreign investors also

began to participate in Finnish funds. Obtaining the optimal tax treatment still requires someadministrative work by the fund and sometimes legal assistance. Although it was previously

believed that international investors often just lack trust in Finnish fund structures, recent

developments indicate that this may not necessarily be the case, as more foreign investorshave been attracted to Finnish limited partnerships. For non-Finnish investors that do notful l the relevant criteria, Finnish fund structures may still be non-favourable as it may bemore bene cial to make the investment directly to the portfolio company instead of investingin a Finnish fund.

In addition, tax considerations pose an obstacle for investments by charitable associations in venture capital funds and in non-listed companies.

7.2 Recommendations

The following issues related to taxation in Finland should be resolved in order to promote venture capital investments:


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1. The provision regarding the maximum binding fund term should be amended orabolished;

2. The matters to be led in the trade register should be minimised (so that e.g. partners,commitments and changes therein no longer need to be led).

3. The participation exemption on share sales should be extended to venture capitalcompanies;

4. Venture capital funds should not be obliged to levy withholding taxes on dividendsdistributed by target companies;

5. Due to the lack of tailored tax rules, speci c guidance from the tax administrationcovering the relevant tax aspects of venture capital fund activities should be prepared tominimize the open issues;

6. The tax administration should provide a full range of documents, information andservices in English;7. The risk of taxing foreign venture capital funds or their investors (based on investment

decisions made or permanent advice given in Finland) should be eliminated by explicitregulations;

8. Section 9.5 of the Finnish Income Tax Act should be amended to also cover the investorsresident in countries with which Finland has not concluded a double tax treaty (or atleast an agreement on exchange of information) and to equally apply in situations with

funds of funds;9. Investments made by associations for the public good through venture capital funds

should be taxed in a similar way as corresponding direct investments and investmentsin investment funds.

7.3 Legal

In the majority of cases, Finnish venture capital funds are structured as limited partnershipsin accordance with the Finnish Partnerships Act. No special legislation applies to venturecapital activities, but venture capital funds are subject to general contract and corporate law.The Act entered into force on 1 January 1989 and has been subject to only a few amendments.

Although a majority of the provisions in the Act are non-mandatory and as such enable thepartners in the limited partnership to arrange their contractual relationship, some mandatoryprovisions exist, which mandatory provisions also apply to Finnish venture capital funds.

Taking into account the special nature and features of venture capital funds, the followingissues may be seen as obstacles to venture capital funds activites:

7.3.1 Termination of the partnership agreement According to Chapter 5, Section 2, of the Partnerships Act, if the agreement has been enteredinto for a period exceeding 10 years, each partner in a limited partnership has the right toterminate the partnership agreement after the agreement has been in force for over 10 years.

A provision in the partnership agreement restricting this right is invalid. Accordingly, theprovision enables limited partners (and even the general partner) to terminate the partnershipagreement even if the funds investments have not yet been realized. This provision should beamended or abolished, e.g. by making the provision non-mandatory in relation to venturecapital funds, at least if the general partner is a legal person. Such changes have been underdiscussion.


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7.3.2 Registration procedures Venture capital funds are subject to rather stringent rules relating to trade register registrations. Although these rules may not affect Finnish venture capital funds possibility to raise foreigncapital, they unnecessarily increase the workload of the general partner (and in certain casesalso of the limited partners). The registration requirements also have a negative impact on thetransferability of partnership interest. Among other things, the following matters shall be ledin the trade register:1. establishment of the limited partnership (i.e. registration of partnership agreement);2. the capital contributions of each partner;

3. amendments to the partnership agreement; and 4. all changes relating to the partners and their capital contributions.

One solution to this problem could be to establish a similar - articles of association - mechanismfor limited partnerships as for limited companies. Accordingly, limited partnerships wouldregister their partnership agreements in the trade register and be responsible for maintainingand updating partnership-speci c registers of partners and their interests in the limitedpartnership. Should such a mechanism be applied, changes in the partners and their interest would not require noti cation to the trade register, and the names of individual partners would not have to be publicly available. Such a mechanism would be more logical and would better suit the realities of the venture capital market. More importantly, it could signi cantlyhelp enabling more exible transferability of partnership interests and accordingly result inthe development of new fund products. These changes have also been discussed.

7.4 Tax

7.4.1 General remarksFinnish venture capital funds are usually established in the limited partnership form, theinvestors acting as limited partners and the management company as the general partner. Apartnership is not treated as a separate tax subject but only as an accounting unit for Finnishtax purposes. The total income of a partnership is allocated to the partners to be taxed as theirincome deriving from the partnership. Special provisions apply to the dividends received by apartnership. Such dividends are taxed in the hands of partners in the same way as they wouldhave been taxed in the case of direct ownership of the shares.

According to current legislation (Section 9.5 of the Income Tax Act), also the share of pro t ofa non-resident partner (residing in a country with which Finland has concluded a tax treaty) ina Finnish limited partnership carrying on venture capital activities is taxed in a similar way tosuch an investors direct investment in a target company would have been taxed. For instance,a non-resident partner is not taxed in Finland on the capital gain derived from the sale ofshares in target companies (with the exception of real estate companies, as allowed in theapplicable tax treaty). In practice, only dividends from Finnish target companies and possiblereal estate related income remain taxable in Finland (if not restricted in the tax treaty). Afterthe Finnish Supreme Administrative Court rulings (KHO 2007:10 and KHO 2007:11) therelief also applies to partnerships considered as real estate funds and funds of funds. Thus, with the exceptions mentioned in section 6.4.5, Finnish venture capital funds ful l the basicrequirement of being treated as ow-through entities for both domestic and foreign investors.No income or wealth tax is imposed at the level of a Finnish venture capital fund in alimited partnership form. No transfer tax is due on the sale of partnership interest, althoughacquisition of shares in target companies is subject to transfer tax.


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Management fees paid by a venture capital fund to its management company should beinterpreted as a VAT exempt sale of nancial services based on the Finnish Central TaxBoard ruling on 12 December 2007 (number 57/2007). The preliminary ruling is generallyapplicable to the activities of Finnish private equity funds and it amended the previous legalpraxis. The practical implication of the new ruling is the possibility of not having to register

VAT groups merely in order to avoid VAT on management fees. In accordance with the EC VAT Directive, the member states should exempt from taxation inter alia the managementof special investment funds as de ned by Member States. Based on the above mentionedruling, it can be interpreted that management of customary private equity funds (at leastif the management company is responsible for the overall management) should be treatedas a separate entity constituting a special and integral part of the VAT exempt activities of

the fund. Therefore, the management fees paid by a private equity fund to its managementcompany should be interpreted as a VAT exempt sale of nancial services.

It is possible that in situations where actual decision making on investments takes place inFinland, or a foreign investor permanently uses a related Finnish advisor, a foreign venturecapital fund could be considered to have a permanent establishment in Finland. This calls forlegislative actions or at least administrative guidance to avoid constitution of a permanentestablishment.

There are also certain other tax-related issues that need to be clari ed for venture capitalfund purposes. The tax rules applicable to limited partnerships mostly relate to activities notassociated with venture capital. The tax authorities are still often unfamiliar with the specialfeatures of venture capital arrangements. Thus, there is a lack of clear guidance on how thegeneral tax rules should be applied to venture capital funds and their investors.

The most signi cant issues still requiring legislative or other actions are presented below ingreater detail.

7.4.2 Participation exemption A signi cant problem in Finnish legislation concerning venture capital funds relates to theFinnish legislation on taxation of capital gains derived from shareholdings. According to thelaw, the capital gains on xed asset shares are exempt from taxation in certain situations. Thegeneral rule is that such capital gains are tax-free for corporations if the seller has owned at

least 10% of the share capital of the company in question for a period of at least one year.The exemption does not, however, apply to the sale of shares by companies where the mainactivity consists of venture capital (private equity) investments. This leads to a situation wherecapital gains from the sale of shares received by venture capital funds (if established as Finnishlimited liability companies or if the sale is made by a Finnish holding company owned by thefund) are always subject to taxation.

On the other hand, lack of participation exemption may be utilized in certain situations asconversely the liquidation loss of a private equity company is generally tax deductible.

Furthermore, the participation exemption described above is not applicable to the sale of realestate companies. This means that the sale of shares of a Finnish real estate company createstaxable income in Finland. It is, however, open to interpretation whether Finnish or foreigncompanies owning shares in real estate companies are regarded as real estate companies forFinnish tax purposes.


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7.4.3 Practical tax issues Withholding taxation presents certain practical problems for venture capital funds. Accordingto Finnish legislation, venture capital funds are obliged to withhold tax on dividends distributed

by target companies. This means an administrative burden for the general partner, which maylead to a situation where Finnish investors/funds are unwilling to accept foreign investorsin Finnish venture capital funds. In addition, if a limited partnership is in a loss makingposition, it is questionable whether withholding tax is justi able at all. Such a situation maylead to double taxation of dividends, since Finnish withholding tax might not be credited inthe investors country of residence. The amended Finnish legislation on dividend withholdingtaxation can, however, restrict the Finnish tax burden in cases where the investor is residentin an EU/EEC member country.

Even though a ow-through treatment of funds is desirable, it also causes problems since thetax treaty between Finland and each investors country of residence (when applicable) may

be applied. When the fund receives income from various countries and includes investorsfrom several countries it is in practice dif cult to keep track of the taxation applicable to eachinvestor and plan tax ef cient fund investments. The situation is even more complex in fundof fund structures. There is e.g. a risk that the investor will pay too much tax if their statusas exempted non-residents is not appropriately noti ed and evidenced to the tax authorities.

The tax rules applicable to limited partnerships are mostly enacted for activities other thanthose of venture capital, and suf cient lower level guidance on the relevant interpretationsconcerning venture capital funds is lacking. The tax authorities are often unfamiliar with thespecial features of venture capital arrangements. Thus, there is not always clear guida

obstacles to nordic venture capital funds 2011.pdf

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