Earlier this summer, Sweden’s top court – the Swedish Supreme Administrative Court – passed its final judgement in a decade-long legal battle that had pitted a number of big Nordic private equity firms against the country’s tax authority over how carried interest should be treated.

In a judgment that went against firms such as Altor, EQT and Nordic Capital, the court ruled in favor of the Swedish Tax Agency and determined that a significant portion of carried interest paid to general partners should be taxed as income, not capital. While this was the most highly publicized case of Sweden’s tax authority acting against private equity, it was not the only one. The result, according to a person with knowledge of the situation, was “a complete loss of confidence” in Sweden’s tax and court system. This loss of confidence is prompting Sweden-based funds to explore leaving the country.

The person said it is “a fact” that funds based onshore in Sweden are now considering whether to go offshore. While there is no direct link between Sweden’s decision to change how carry is taxed and a decision on where to domicile, this person said there is an indirect link “insofar that the general feeling among practitioners and tax advisors is that the tax authority has not pursued things in a balanced manner.”

The aggressiveness of the tax authorities and the view taken on the law and on the tax code by the administrative court “has made its mark,” the person said. “People have completely lost confidence in the tax authorities, and more importantly, have lost faith in the courts and the court system. This loss of faith will affect future decisions about whether to go on or offshore.”

The tax move is roughly in line with the country’s push to reduce economic disparities. The Swedish government has been taking initiatives in its redistribution reform policies that give investing in programs such as employment and education precedence over tax cuts. Individuals who take on carry, instead of paying 25 percent, would now be subject to a tax rate closer to 60 percent, in addition to social security contributions. And those higher payments will simply boost the country’s coffers and help pay for Sweden’s various social welfare programs. Taxes collected from income, profits and capital gains contributed 36 percent of the 1.93 trillion Swedish kronor ($212 billion; €182 billion) in total tax revenue collected in 2016, according to data compiled by OECD.

“It is correct that the Swedish Supreme Administrative Court has ruled in favor of the tax agency in a number of cases on carried interest,” a spokesman for Sweden’s Finance Ministry told pfm. “However, the main issues have not been where these funds have been located, but rather how the carried interest has been declared.”

Still, he pointed to other rules, such as the recently revised controlled foreign corporation rules, as a signal of the government’s current combative stance, saying that “step by step this government is making sure it’s more difficult to run away from your tax obligations.”

But rather than chasing Swedish firms away, one leading tax lawyer says the more aggressive posture taken by the tax authorities has influenced funds’ decision to base onshore. “If you’re onshore you don’t have the echo system of people in a tax haven advising real humans at the GP. If you bring everything onshore it means there is no ‘adviser to the fund’ situation and it does make you less vulnerable to tax authorities. It’s less provocative. I don’t want to say structuring a fund offshore, where the GP isn’t, is provocative. But, well…”

One Swedish fund that decided to base itself onshore from inception was Adelis Equity, the mid-market investor co-founded by Gustav Bard, the former chief executive of 3i Nordic.

“When we set up in 2012, there was a lot of uncertainty about where the tax interpretation by the authorities would end up for Jersey and Guernsey structures,” said Adalbjörn Stefansson, head of investor relations at Adelis. “As we were starting fresh with no legacy structures, we decided to give [Sweden] a try. Obviously as a mid-market investor in Swedish companies we also saw there might be some market goodwill for having a Swedish structure.”

Stefansson believes Adelis was the first firm explicitly targeting non-Swedish investors to be onshore. He said “it took some time for the tax people to get around it” but after Altor decided to base its fourth fund – a €2 billion vehicle – in Sweden in 2014, it “solved the issue.” The model was then proven.

Regarding the taxation of carry, Stefansson said the rules are complex and there are some exceptions. The first €500,000 or so in dividends in any given year is taxed as income, at a marginal tax rate of 50-55 percent, and anything above that is taxed as capital gains at 30 percent, he said.

This is the same rate, Stefansson added, as the local law firm, grocery shop owner or small business.

Others, however, question whether there is any goodwill resulting from a Sweden base, with one observer pointing to Valedo Partners, which was founded by former employees of EQT.

“There might be this idea that ‘let’s go onshore and alleviate some of that pressure and get more favorable treatment,’” says one adviser. “It doesn’t work. Look at Valedo. They have always been onshore and the tax authority went after them to get them to pay corporate income taxes on management fees.” He said it was unprecedented for the authorities to try and tax the fund entity in this way.

The decision by the authorities to sue Valedo may have had a ripple effect. At the time of the announcement, Nordic Capital was considering whether to base its ninth fund in Sweden or Jersey. “They were putting serious resources into the case for going onshore [to Sweden],” says one Scandinavian GP. “They’d spent hundreds of thousands. Mid-way through mapping out how it might work if they went onshore, the Valedo verdict came in. And this was one of the reasons they decided against it.”