On 4 April 2011, the Finnish Supreme Administrative Court issued and published an advance ruling (KHO 2011:31) concerning the tax treatment of compensations for board member duties performed by a private equity company in a portfolio company of a managed private equity fund.
In the ruling, the Supreme Administrative Court stated that from tax perspective a membership in the board of directors is a personal duty and cannot be carried out by an entity carrying on private equity activities. Therefore the compensation has to be taxed in the hands of the individual board member and cannot be allocated to the entity employing the board member and managing the fund's investments in the portfolio company. The ruling maintained in force the previous ruling given by the Central Tax Board in the same matter.
The ruling clarifies the legal situation relating to tax treatment of board member compensations. Although the membership relates to the management of the investment of the private equity fund, the appointed member is taxed personally for the compensation relating to the directorship as earned income.
The relevance of the ruling should — taking into account also any provisions of fund agreements that stipulate how (if at all) board membership fees affect the management fees paid by a private equity fund — be considered in determining how and what fees are charged in relation to participation in the management of a portfolio company.
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