In a recent High Court decision – the “Herkules case” – it was concluded that carried interest should be considered employment income. The decision was appealed with the Supreme Court, but highlights the risk of structuring Norwegian management of private equity funds. The case comes as a follow up of previous cases related to brokers, where internal partnership profit distributions to each brokers private holding companies has been classified as employment income of the individual broker. The court’s decision disregards the accepted practice of letting active shareholders, at their own discretion, decide whether to take out employment income, dividend or let the income remain in the company.
In the actual case, the carried interest was distributed through a complex structure to a company responsible for management of the private equity funds, and thereafter to the individual beneficial owner’s private companies. The court had to consider whether the income should be classified as tax exempt capital income, taxable business income or whether the net income was to be reclassified as employment income to the hands of the management as individuals owning the private companies. The County Court concluded in the first instance, that the income was to be classified as taxable business income. It is expected that the classification will also have an impact on the private equity funds themselves on whether the carried interest is to be classified as a deductible cost or an unequal division of profit distribution. The recent decision from the Court of Appeal concluded that it was also to be reclassified as employment income. It is not yet known whether the Supreme Court will accept the appeal from the Court of Appeal. Until the Supreme Court has reached its decision, the interpretation of the law will remain uncertain.