Supreme Court of Norway clarifies tax treatment of carried interest in Norway by its “Herkules - ruling”
In a recent ruling, the Supreme Court of Norway states that carried interest for tax purposes is to be treated as operational income, i.e. a success based part of the advisory fee rather than income of employment or capital. For 2016, the tax rate for operational income is set to 25% and planned to be reduced to 22% over the coming years. Hence, the tax authorities’ original view that carried interest should be treated as personal income and consequently taxed at approx. 65% was overruled.
The court appreciates the fact that “investors have been willing to share a part of their profits with the principles [i.e. the beneficial owners of the GP and advisory company of the fund] in exchange for providing the opportunity to invest in non-listed companies and for their own investment of work and capital” and therefore concludes that carried interest should be regarded as part of the profit generation of managing a fund.
In conclusion, carried interest is regarded as operational based profit share for founders and owners.
There is still room for argumentation that carried interest should be regarded as income of capital in specific circumstances where the level of (active) involvement and/or risk taking e.g. in conjunction with the establishment of the fund or the capital exposure are of different character.