Carried interest in the Nordics

Carried interest is a fundamental component of modern private equity fund structures. Within the private equity industry, the term is well-established: it refers to a pre-negotiated contingent right to a disproportionate share of a fund's profits, accruing only once investors have received their contributed capital, together with a minimum annual return, the hurdle rate or preferred return. The carried interest entitlement, typically set at 20% of returns above the hurdle, is therefore asymmetrical relative to the carried interest recipient's investment, and may never materialise at all if the fund's performance falls short of the required threshold.

Carried interest remains a contentious topic in taxation, with significant variation in its treatment across jurisdictions, but also with variations in the structuring thereof.

In Denmark, taxation of carried interest is regulated directly in Danish tax law. In Sweden, carried interest is not a defined term in the Swedish Income Tax Act, and income derived from it must be allocated as either employment income or capital gain. Similarly, carried interest is not subject to specific statutory regulation in Norway, where its taxation is assessed under the general provisions of the Norwegian Tax Act, with an allocation of income to either employment, capital, or business activities, based on a factual assessment of the structure, risk, and the underlying reality of the arrangement.

This article examines the treatment of carried interest across these jurisdictions, exploring the key tax considerations that arise for fund managers.

Denmark

Denmark has a statutory framework for the taxation of carried interest. The conditions for being subject to the Danish carried interest regime are that the person is 1) fully taxable to Denmark, 2) has a preferential position over other investors, and 3) is investing via a fund qualifying as a private equity fund, a venture capital fund, or an infrastructure fund. The investment can be either direct or indirect, i.e., through a company and the law contains provisions for both direct and indirect holdings. Recently the Danish Tax Council issued two new binding rulings resulting in a broader scope for the application of carried interest, which may impact the structuring of MIP/employee share programs going forward.

Recent rulings

The two binding rulings addressed the question of whether a director and the former owner of the company group being part of the private equity investment were subject to taxation under the carried interest regime. Both individuals were involved in the management of the target group both before and after the investment. The director and the former owner subscribed for shares via personal-owned holding companies in the target group but not through the private equity fund itself. All shares in the group were subsequently sold, and the former owner and the director received a larger share of the investment return than their proportional ownership of the participation capital would have otherwise warranted.

The Danish Tax Council emphasised that the carried interest regime does not depend on whether the investment is made directly or indirectly in the private equity fund (the investment entity) or in a company in which the private equity fund has invested. The key factor is not the individual's specific relationship to the fund, such as being a private equity partner, or an employee/director of a company in which the private equity fund has invested. Instead, the key factor is whether the individual holds a preferential position compared to other investors.

As a consequence, participants in MIP/employee share programs in companies where a private equity fund etc. has invested, may face significantly higher taxation (carried interest taxation) if these individuals possess a preferential position.

Norway

Norway does not have a specific statutory regime for the taxation of carried interest. The taxation of such income must therefore be determined on the basis of general principles of Norwegian tax law and established case law. The central issue is attribution of carried interest to the correct taxpayer, and whether the attributed income constitutes employment income (Nw. "arbeidsinntekt"), business income (Nw. "virksomhetsinntekt"), or capital income (Nw. "kapitalinntekt"). The distinction is of importance given the differences between these categories in applicable tax rates, applicability of social contributions, and possibility to postpone taxation.

The Herkules ruling

Taxation of carried interest has been considered by the Norwegian Supreme Court in the leading Herkules case (Rt-2015-1260). The case concerned the tax classification and attribution of carried interest in a private equity structure with two Jersey based funds, with a general partner ("GP") being responsible for investment decisions and a fund management company being responsible for certain services such as analysis of potential acquisitions and follow-up of portfolio companies. The fund management company received an annual management fee equal to 2% of the committed capital of investors. Carried interest was set to 20% of the return of the funds above a hurdle of 8%. Carried interest was allocated to the GP, with 60% of the carried interest being passed on to holding companies owned by three key individuals employed in the fund manager.

The Norwegian tax authorities took the position that the portion of carried interest allocated to the principals' holding companies had to be attributed to the fund management company as business income, and further that the same amount had to be attributed to the three principals personally as employment income. Before the Supreme Court, the appellants had already accepted that the carried interest in this particular case was to be regarded as business income. The case thus does not conclude whether carried interest must be classified as income from business activities, or whether carried interest also can be classified as income from capital. The dispute concerned two questions: first, whether that income should be attributed to the GP or to the fund management company; and second, whether the income should be reclassified as employment income and attributed to the principals personally.

The Court's starting point was that the tax classification and attribution of income must be based on the underlying private law reality, and that where the relevant dispositions are genuine and binding between the parties, they must in principle be respected for tax purposes, departure being possible only through the general anti-avoidance doctrine or Section 13-1 of the Norwegian Tax Act.

On the first question, the majority of the judges held that it cannot in itself be decisive that funds have been paid out pursuant to an agreement that is binding between the parties, it must additionally be required that the company which has received the payment has, in reality, made a contribution that can justify it. The majority found that the central point in this case was that the GP was in reality the entity that had made the investment decisions, and that it is these decisions that lead to increase in value and thereby to carried interest. Furthermore, the GP's board has held a number of meetings at which proposals from the fund management company were subject to a genuine assessment. On that basis, the majority found that there was a genuine commercial rationale behind the corporate structure and the allocation of carried interest to the GP, such that the private law reality was that the GP had a valid claim to the payments, and the income could therefore not be attributed to the fund management company under ordinary tax attribution principles.

On the second question, all the judges found that the income could not be reclassified as employment income for the principals. Although their work had undoubtedly contributed significantly to value development in the funds, the income was by its nature profit from the fund management business, which had accrued to the principals in their capacity as owners – and it was not solely the result of the principals' own work, but also of the efforts of the wider organisation and of value creation in the portfolio companies and the general market development. The principals were found to be genuine owners in the companies and received carried interest in accordance with their genuine ownership interests.

The judgment confirms that carried interest may be treated as business income and need not be reclassified as employment income, provided the corporate structure reflects a genuine private law reality, the receiving entity has made a real contribution that justifies the payment, and the principals receive the income in their capacity as genuine owners.

Current legal landscape

Following the Herkules judgment, the Norwegian approach remains principle-based and dependent on the specific facts of each case. While the decision provides support for respecting agreed fund structures, it does not preclude reclassification in cases where the arrangement lacks real economic risk or deviates from arm’s length principles.

In fund structures where carried interest is structured as a return on a capital investment, the attribution and classification should be accepted provided it can be demonstrated that the recipient has made a true investment and receives a return on the investment. It may furthermore be important to be able to demonstrate that the recipient has made contributions that justify the payment of carried interest as a return on investment, and that the investment has a risk profile justifying a potential asymmetrical return.

The ability to demonstrate that the GP or fund manager has received a sufficient return on its business activities, has proven to be important in certain cases related to carried interest where the Norwegian tax authorities have challenged the attribution and classification of carried interest. In such cases, the tax authorities have argued from a transfer pricing standpoint that a portion or all carried interest should be attributed to the GP to ensure that the GP receives an arm’s length remuneration for its services. In the matters we are aware of, the GP has been able to sufficiently demonstrate that it has received a sufficient return on its business activities (also when considering that the GP has limited risk in relation to its operations), resulting in challenges being dropped.

Finally, structures where cornerstone investors participate in carried interest alongside and on equal terms with the GP, should in our view be further robust when it comes to the question of tax classification and attribution, since such structures should clearly demonstrate a genuine business rationale for the investment made by also the GP.

As the summary above suggests, there remains a degree of uncertainty under Norwegian tax practice, and careful structuring is required to achieve the intended income treatment.

Sweden

Sweden lacks a specific statutory regime for the taxation of carried interest, which means that the nature of such income must be determined by case law and within the broader provisions of the Swedish Income Tax Act, i.e., as salary or as capital income, generally under the so-called 3:12 rules for closely held companies.

Over the years, the Tax Agency has repeatedly challenged the capital income treatment of carried interest. In recent practice, the Agency has argued that if carried interest was not paid through the GP, or if the 3:12 rules were not deemed applicable, the income should instead be treated as salary, leading to significantly higher effective taxation.

After 15 years of legal proceedings, the Supreme Administrative Court, on 19 June 2025, HFD 2025 ref. 40, issued a long-awaited ruling on the tax treatment of carried interest. The Court confirmed that income derived from carried interest should be taxed as return on capital, not as salary. In this case, similar to the ruling from the Supreme Administrative Court in 2018 (HFD 2018 ref. 31), the so-called 3:12 rules on closely held companies (Sw. "fåmansföretag") were deemed applicable, resulting in split taxation, with part of the income taxed at progressive rates, and part at the flat capital income tax rate.

The new Nordic Capital ruling

HFD 2025 ref. 40 involved an individual intending to invest in a fund structure, where carried interest was contractually allocated to the initial limited partner (the "ILP"), rather than the GP.

While the taxpayer and the Tax Agency agreed that salary taxation did not apply, they disagreed on the underlying rationale. The taxpayer argued that the contractual terms should be respected, whereas the Tax Agency contended that the carried interest income should be attributed to the GP for tax purposes, despite the ILP contractually holding the profit share rights. However, since the GP and the ILP were in the same group, this attribution had no tax consequences for the taxpayer. The Council for Advance Tax Rulings sided with the Tax Agency.

The Court took another position. Drawing a parallel to Swedish limited partnerships, where profit-sharing agreements are generally respected for tax purposes unless they result in improper income shifting or are clearly tax-motivated, the Court found that the allocation to ILP was commercially justified.

Accordingly, the Court held that the carried interest represented a return on investment, not compensation for work. Consequently, no salary income arose for the individual investor.

This decision marks a clear rebuke of the Tax Agency's position over the years. The judgment affirms that carried interest is a negotiated profit share between independent parties and should not be automatically characterised as compensation for work.

From a legal certainty and predictability standpoint, this decision is welcome and should prompt the Tax Agency to reconsider its position in ongoing and future disputes regarding the taxation of carried interest.

The Swedish Tax Agency's stance

On 1 September 2025, the Swedish Tax Agency published a statement (no. 8-270310-2025) regarding HFD 2025 ref. 40.

In its statement, the Tax Agency acknowledges that the Court’s ruling establishes that neither the ownership structure nor the share classification should carry independent weight when assessing the tax treatment of carried interest. However, the Agency emphasises that the profit allocation in the case was made under a partnership agreement, raising questions about the ruling’s applicability to corporate fund structures.

Although the Tax Agency initially indicated that it would reconsider its position in light of the judgment, many industry observers noted that reassessments and disputes have persisted throughout the summer and early fall of 2025. However, lately, the Tax Agency has dropped certain cases with reference to the Court's ruling (see our previous newsletter here).

Denmark

The taxation of carried interest differs depending on whether the individual has invested directly or indirectly.

Direct investment

If an individual makes a direct investment in a private equity, venture, or infrastructure fund, any excess return on the investment is treated as personal income and taxed accordingly. As a result, carried interest is subject to the individual's standard personal tax rate.

Denmark operates with a progressive tax rate, which includes that income exceeding DKK 641,200 (2026) after AM contribution is subject to a middle-tax of 7.5%, income exceeding DKK 777,900 (2026) after AM contribution is subject to an additional top-tax of 7.5%, and income exceeding DKK 2,592,700 (2026) after AM contribution is taxed with an additional top-top tax of 5%. This means that any personal income that exceeds approximately DKK 2.6 million (2026) will be taxed at a rate of 60.5%.

The special carried interest rules only apply to the portion of the return that exceeds a standard return. This standard return corresponds to the return earned by the regular investors in the fund.

Relief is available for foreign taxes as well as for any additional taxes imposed on the excess return under Danish tax law. However, the reduction of such taxes is limited to the proportion of total Danish and foreign taxes attributable to the individual's excess return.

Indirect investment

If an individual invests in a private equity, venture, or infrastructure fund through a company, the carried interest tax rules still apply if the individual has direct or indirect control over the investing company. Control is considered to exist if the individual:

• Directly or indirectly, alone or together with a close related family member, owns more than 50% of the company's share capital or holds more than 50% of its voting rights, or
   
• Is a co-founder or is/has been involved in the management or operations of the fund or its portfolio companies. The same is relevant if the close related family member is the co-founder or has had or has the mentioned role.
   

For indirect investments, the individual's taxable income includes the company's excess return on fund investments as controlled foreign company ("CFC") income. This means the individual is taxed as if they had earned the excess return directly. In Denmark, CFC income is subject to a 22% tax rate.

Foreign taxes on the excess return qualify for relief under Danish tax law. Additionally, tax relief is available corresponding to the company's Danish and foreign taxes on income derived from the excess return. However, in both situations, the relief cannot exceed the portion of the total Danish and foreign taxes attributable to the individual’s excess return. 

Finally, any dividends distributed from the individual’s company to the individual personally are not included in the individual’s personal taxable income to the extent that such dividends do not exceed the CFC tax payable.

Norway

As Norway lacks a specific statutory regime for carried interest, the taxation depends on the attribution of the income and classification of the income as either employment income, business income, or capital income. This classification is decisive for the effective tax burden and must be determined based on a concrete assessment of the structure, including the allocation of risk, ownership, and the individual’s role in the structure.

Employment income 

If carried interest is classified as employment income, it is subject to progressive tax rates reaching a maximum effective marginal tax rate of 47.4% (2026) for income exceeding NOK 1,467,200. Included in the marginal tax rate of 47.4% is the social security contribution (Nw. "trygdeavgift") of 7.8% on gross salary. 

The employer is liable for employers' social security contributions (Nw. "arbeidsgiveravgift") at a standard rate of 14.1%. The contribution is deductible as a business expense and the true cost of the contribution is for the employer thus lower.

Business income 

If carried interest accrues to a management company to be taxed as business income, the profit is taxed as ordinary corporate income at a flat rate of 22% (2026), with an additional 3% finance tax applicable to financial sector entities, resulting in a rate of 25% (2026) where applicable.

Upon subsequent distribution as dividends to an individual shareholder, such income is taxed under the shareholder model (Nw. "aksjonærmodellen") at an effective rate of 37.84% (2026). The combined effective tax burden of the personal shareholder is thus approximately 53.4%, prior to any applicable risk-free return allowance on the distribution (Nw. "skjermingsfradrag").

Capital income 

Where carried interest is considered a return on investment and taxed as capital income, the tax treatment depends on whether the investment is held personally or through a limited liability company. 

Where carried interest is received by a limited liability company and classified as capital income, participation exemption (Nw. "fritaksmetoden") under Section 2-38 of the Norwegian Tax Act applies. Under this regime, capital gains on shares are fully tax exempt and dividends on shares are subject to an effective tax rate of 0.66%.

Upon distribution from the holding company to the individual shareholder, the dividend is taxed at an effective rate of 37.84% (2026), prior to any applicable risk-free return allowance on the distribution.

Sweden

Similarly to Norway, the lack of specific statutory regime for carried interest means that the taxation depends on the classification of the income.

Income from employment

If carried interest is treated as income from employment, it is subject to progressive income tax rates, up to approximately 50%. Additionally, employer social security contributions at 31.42% may be levied, increasing the overall potential tax burden significantly also for other involved entities.

Capital income

The Tax Agency’s position was for many years that carried interest income could only be taxed as capital income to the extent the 3:12 regime applied. In all other cases, the income should according to the Tax Agency be taxed as salary.

Following the Court’s clarification in HFD 2025 ref. 40, carried interest should represent a return on investment, not compensation for work, provided that the profit allocation under the fund agreement does not constitute an improper transfer of income or appear unreasonable and primarily tax‑driven. 

Under the 3:12 regime

If carefully structured, carried interest paid on shares may be taxed as capital income under the specific 3:12 rules for shares in closely held companies. There are many carried interest cases in the Swedish courts, where the courts have held that, if the partner receives carry on shares and holds an interest in the GP, carried interest should be taxed as capital income on shares in a closely held company. The effective tax rate ranges from 20% to 53%, with no payable social security.

Somewhat simplified, the 3:12 rules regulating shares in closely held companies divide capital gains and dividends on “qualified” shares, partly taxing the income at progressive rates up to approximately 50% and partly taxing the income as capital income at a rate of 20–30%. Shares in closely held companies are considered qualified if the holder is, or has previously been, active to a considerable extent in the company or in another closely held company.

Where carry is distributed as dividends, an amount would be taxable at 20% (based on standard amounts or acquisition costs), then up to approximately SEK 7 million at 50%, and the remaining amount at the capital income tax rate of 30%.

Where a Swedish partner invests via a private Swedish limited liability company, the partner should be able to receive the carry in the holding company at nil tax and extract it when needed or after a four-year waiting period.

In addition to holding an interest in the GP, it is recommended that a Swedish partner makes a “substantial” co-investment into the GP and the carry shares, based on a third-party valuation, to show that the investment is indeed made at market value and that any future carried interest return is “stapled” to a substantial co-investment. This helps mitigate against employment income risks, particularly the likelihood of a challenge around payment of the market value for the shares. 

Certain countries have made industry friendly changes to their tax regime in order to attract professionals within the funds industry. Most notably, Luxembourg enacted in 2026 a new tax regime for carried interest, providing a competitive, clear framework for fund professionals. It offers a 11.45% tax rate for contractual carry and a 0% tax rate for qualifying participation-linked carry, supporting deal-by-deal structures and broadening beneficiary eligibility to enhance competitiveness.

There are no signals of similar changes in Norway and Denmark. Furthermore, where Denmark already has law provisions setting out the rules for taxation of carried interest, there have been no initiatives from lawmakers to provide more clarity on taxation of carried interest in Norway.

The ongoing legal challenges and the Swedish government's inquiry into carried interest taxation suggest that changes may be on the horison in Sweden. For private equity firms and fund managers operating in Sweden, the current uncertainty requires a cautious approach, particularly in structuring carried interest payments and in determining the tax implications for the individuals and entities involved.

On 28 January 2025, a proposal on specific rules on the taxation of carried interest was presented to the Swedish Ministry of Finance (see our previous articles here and here). The proposal aims to clarify and standardise the taxation of such income, addressing the current ambiguities and legal uncertainty.

The new rules were proposed to fall under the 3:12 framework, which meant that part of the income would be taxable at progressive rates (up to 54%) and part would be taxable as capital income (20-30%). The proposal was intended to create a more predictable and equitable tax environment for private equity operations in Sweden. However, to date, the Swedish government has not moved forward with the proposal.