The Divergent Tax Treatment of Carried Interest in Europe - Between Double Taxation and Non-Taxation: A Legal Framework in Need of Reform?
(2025) HARN60 20251Department of Business Law
- Abstract
- This thesis examines the differing tax treatment of carried interest in Europe, focusing on Germany, the United Kingdom, and Sweden. Carried interest is a special profit-sharing mechanism commonly used in private equity funds, whereby the executives are awarded a capital disproportional share of the profits. Due to its dual nature, blending elements of both capital gains and service compensation, it raises unique classification challenges. The central question of the thesis is whether these divergent national treatments create risks of double (non-)taxation in cross-border contexts, and, if so, how legal reforms might mitigate such risks.
To address this question, the thesis first outlines the organisational structure of private equity... (More) - This thesis examines the differing tax treatment of carried interest in Europe, focusing on Germany, the United Kingdom, and Sweden. Carried interest is a special profit-sharing mechanism commonly used in private equity funds, whereby the executives are awarded a capital disproportional share of the profits. Due to its dual nature, blending elements of both capital gains and service compensation, it raises unique classification challenges. The central question of the thesis is whether these divergent national treatments create risks of double (non-)taxation in cross-border contexts, and, if so, how legal reforms might mitigate such risks.
To address this question, the thesis first outlines the organisational structure of private equity funds and explains how carried interest arises within that framework. Next, it presents a comparative analysis of each country’s domestic regime. Germany treats carried interest as capital gains, but it is reclassified as self-employment income (with a partial income exemption), the UK historically treats it as capital gains but forthcoming changes will see it treated as ordinary income, and Sweden applies its closely-held-company rules to split it into capital gains and labour income. Building on these comparisons, the thesis analyses how the OECD Model Tax Convention applies to carried interest, highlighting situations in which conflicting classification (as capital or labour income) could result in double (non-)taxation. An example cross-border scenario illustrates these risks. Finally, drawing on experiences with hybrid mismatches, the thesis proposes legal reforms at the national, OECD, and EU levels including clarifying treaty interpretation and harmonising carried interest regimes to reduce mismatches.
The analysis concludes that, without reform, divergent domestic rules and inconsistent treaty interpretations will continue to foster uncertainty and double (non-)taxation. Harmonised guidance (through the OECD or EU) is necessary to ensure the coherent cross-border taxation of carried interest. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9192200
- author
- Blüthgen, Birthe LU
- supervisor
- organization
- course
- HARN60 20251
- year
- 2025
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- carried interest, private equity, double taxation, OECD Model Tax Convention, tax planning
- language
- English
- id
- 9192200
- date added to LUP
- 2025-06-03 13:17:48
- date last changed
- 2025-06-03 13:17:48
@misc{9192200,
abstract = {{This thesis examines the differing tax treatment of carried interest in Europe, focusing on Germany, the United Kingdom, and Sweden. Carried interest is a special profit-sharing mechanism commonly used in private equity funds, whereby the executives are awarded a capital disproportional share of the profits. Due to its dual nature, blending elements of both capital gains and service compensation, it raises unique classification challenges. The central question of the thesis is whether these divergent national treatments create risks of double (non-)taxation in cross-border contexts, and, if so, how legal reforms might mitigate such risks.
To address this question, the thesis first outlines the organisational structure of private equity funds and explains how carried interest arises within that framework. Next, it presents a comparative analysis of each country’s domestic regime. Germany treats carried interest as capital gains, but it is reclassified as self-employment income (with a partial income exemption), the UK historically treats it as capital gains but forthcoming changes will see it treated as ordinary income, and Sweden applies its closely-held-company rules to split it into capital gains and labour income. Building on these comparisons, the thesis analyses how the OECD Model Tax Convention applies to carried interest, highlighting situations in which conflicting classification (as capital or labour income) could result in double (non-)taxation. An example cross-border scenario illustrates these risks. Finally, drawing on experiences with hybrid mismatches, the thesis proposes legal reforms at the national, OECD, and EU levels including clarifying treaty interpretation and harmonising carried interest regimes to reduce mismatches.
The analysis concludes that, without reform, divergent domestic rules and inconsistent treaty interpretations will continue to foster uncertainty and double (non-)taxation. Harmonised guidance (through the OECD or EU) is necessary to ensure the coherent cross-border taxation of carried interest.}},
author = {{Blüthgen, Birthe}},
language = {{eng}},
note = {{Student Paper}},
title = {{The Divergent Tax Treatment of Carried Interest in Europe - Between Double Taxation and Non-Taxation: A Legal Framework in Need of Reform?}},
year = {{2025}},
}