On the 28 of January 2025, the Swedish Ministry of Finance released its long-awaited report on the taxation of carried interest, proposing new tax rules for income derived from profit shares in private equity funds.
Carried interest is a special profit share associated with successful investments in private equity/venture capital funds. It means that returns — or right to returns — above a certain level are distributed asymmetrically in favour of key individuals involved in the management of these funds. The correct taxation of this allocation has been the basis of dispute for a period spanning over 15 years between the Swedish Tax Agency and the private equity industry.
Today, there are no specific rules on how carried interest should be taxed. The Swedish Tax Agency has in some cases considered the carried interest to be directly linked to work performance and that carried interest should therefore be taxed as income from employment. In (most) other cases, carried interest has been treated, and subsequently taxed, as capital income once that carried interest is paid out to the individuals. The effective tax on employment income can be vastly higher than on capital income.
Hence, the main question in the time-consuming and costly legal proceedings in the recent yeas has been whether Swedish individuals should be subject to employment tax on carried interest or whether the return should be taxed as capital income (where applicable, applying the so-called 3:12 rules, i.e. partially subject to employment tax – If you want to know more about the 3:12 rules, find our article about the rules here).
According to the proposal, carried interest should be taxed under the 3:12 rules (with a few special requirements), which means that the taxation should correspond to what applies to holdings of qualified shares in closely held companies. Such a regulation would result in a more uniform application of the law in the future, while at the same time, may allow tax relief for private equity capitalists.
In summary, below follows the report's most important proposals:
- Carried interest is taxed according to the 3:12 rules (the rules covering closely held companies).
- A special definition regarding the concept of active to a significant or noteworthy extent is introduced for private equity structures (i.e. Alterative Investment Funds as defined in the AIFM directive). The shareholder is considered to be active to a significant extent if the company is entitled to a special share of profits, and the possibility of receiving such income is related to his or her employment or similar.
- The exception for when a share is not considered qualified due to external investors, the “third-party rule” (sw. undantagsregeln), does not apply in private equity structures.
- The waiting period (sw. karenstiden/trädaperioden) until the shares becomes “un-qualified” due to the owners are no longer active to a significant extent is extended to ten years in private equity structures (compared to the current five years under the 3:12 rules).
- A limitation in the calculation of the wage base in subsidiaries is introduced. In short, this proposal is a restriction on the use of salary expenses in subsidiaries to increase the threshold amount (sw. gränsbelopp) in parent companies.
- In order to finance eventual fiscal loss in tax revenue, a new threshold amount (sw. takbelopp) of 150 income base amounts (compared to the current 90/100) is proposed as one of the alternatives. This threshold amount is the upper limit for when dividends and capital gains are being taxed as employment income for active shareholders in private equity funds.
The proposed rules are meant to address the current legal uncertainty in the private equity sphere. The overall possible positive outcomes of new rules are that the proceedings at the Swedish Tax Agency, as well as in court, will be less time-consuming, less costly and less ambiguities than before. Another possible benefit is that the clarity will strengthen the competitiveness of the Swedish private equity market.
If you have questions about if/how these proposed rules will affect you, you are more than welcome to contact us.
