New report on taxation of carried interest

On January 28, 2025, a new governmental report on the taxation of carried interest was presented. The report aims to create a more predictable taxation of income from carried interest and proposes that this income should be covered by the rules for closely held companies with certain adjustments.

Background and purpose
On January 28, 2025, a new governmental report was presented on the taxation of carried interest. For a long time, there has been uncertainty regarding how carried interest, which is a type of profit sharing within mainly private equity funds, should be taxed. To varying degrees, the recipients have been taxed for a pure capital income, according to the closely held company regulations (also known as 3:12) or as income from employment. This has resulted in extensive administrative costs (according to media reports, the Swedish Tax Agency itself has spent more than 30 000 working days on the issue) and litigation over the last 15 years.

The report aims to create a more predictable taxation of income from carried interest. However, the report has had a short investigation period (from August 6, 2024) and has therefore had a clear directive to bring the taxation of carried interest under the rules for closely held companies.

Main content of the proposal
The report essentially proposes the following:

• Persons who, by virtue of their employment or other assignment, are entitled to carried interest from an alternative investment fund shall be subject to the rules for closely held companies.
• According to the proposal, a shareholder shall be considered to be materially active in a company if the company is directly or indirectly entitled to share in the profits of or in respect of an alternative investment fund, if the shareholder receives a share in the profits of or in respect of the fund that more than insignificantly exceeds the company’s share of the capital committed to the fund and if the shareholder’s ability to receive this income is related to his or her work or that of his or her close associates. The same applies if the undertaking in question is an alternative investment fund. This right thus constitutes the carried interest share for the purposes of the proposed legislation.
• An important exception is that direct holdings of carried interest in certain partner-taxed funds (such as foreign limited partnerships), without the use of intermediate holding companies, may fall outside the scope of the proposed amendments. Such holdings are proposed to be treated under the current rules.
• The exemption for companies with a certain minimum level of passive ownership (Sw. utomståenderegeln) shall not apply to qualifying holdings due to carried interest shares.
• The assessment of whether a share qualifies would be made over a ten-year period instead of the five years currently applicable to other close companies (a period which has also been proposed to be changed to four years). The qualifying period is thus proposed to be 10 years after ceasing to hold carried interest.
• For the purpose of calculating the so-called wage base under the closely held company regulations, the remuneration of employees of subsidiaries of the alternative investment fund shall not be taken into account.
• A special higher cap for taxation in service is proposed to be 150 income base amounts (for 2025: SEK 12,090,000) per year for both capital gains and dividends (compared to the current cap of 100 income base amounts over five years for capital gains and 90 income base amounts annually for dividends, which applies for ordinary closely held companies).
• The proposal is intended to enter into force on January 1, 2026.

Economic impact
The report assumes, based on a number of different estimates, that taxpayers’ income from carried interest could amount to appx. SEK 10 billion per year. Based on this assumption, the report then estimates that the proposal will reduce governmental tax revenue by SEK 600 million in the year of introduction in 2026 and by SEK 300 million per year in the long term. To finance this, the report proposes an increase in the tax on alcohol and tobacco, which is intended to be coordinated with new rules for closely held companies (as proposed by SOU 2024:36, Förenkla och förbättra). The higher cap on salary taxation of dividends and capital gains is a proposal that can be used if additional funding is required.

Commentary
It is welcome that a clearer regulation is proposed that can give the private equity industry more predictability in the taxation of carried interest income. According to the investigator’s own statements, the intention has not been to find a way to fully regulate the taxation of all income from carried interest, but rather to provide a regulatory framework that the industry can relate to and structure its funds by. In this respect, we believe that the possibilities of achieving predictable taxation will increase significantly if the proposal is introduced.

Overall, however, while the proposal provides a clear structure for the industry, the proposed rules drastically worsen the situation for those carried interest holders who already apply the closely held company rules. Among other things, it is questionable whether the extended waiting period of ten years is justified, especially since a person is considered to be active to a significant extent as long as there is a holding of active carried interests. Such interests may continue to be active for several years after a person leaves employment or office, and only when the entitlement to carried interest has ceased does the qualifying period start to run under the proposal. This may result in significantly longer lock-in periods in the closely held company regime for private equity professionals than for shareholders in other closely held companies.

The committee’s estimate of the economic consequences is also questionable as it is based on several uncertain assumptions about what income may actually be within the scope of the proposed legislation. In this context, the report notes that the Swedish Tax Agency currently accepts about 80% of the income tax returns submitted by holders of carried interest, and that these individuals are mainly taxed under the small business system under the current rules. For these individuals, the tax outcome of the proposed rules will be higher rather than lower. Given this, it is questionable whether the estimated economic consequences are accurate – an important question in the context the media attention seems to have largely focused on the assumption that the proposal will result in a large tax cut for employees in the private equity sector. The economic analysis and media attention may make the proposal politically sensitive, and the question is if the government will proceed with the proposal as it stands today.

The way forward
The inquiry proposes that the rules should enter into force on January 1, 2026, which would be at the same time as the changes to the rules on closely held companies proposed in SOU 2024:36 (Förenkla och förbättra).

If the government opts to proceed with the proposal, it must first be prepared by the Ministry of Finance and sent for consultation. It is likely that the proposal will also be coordinated with other proposed changes to the rules for closely held companies. As the proposals are expected to be financed by increased alcohol and tobacco taxes, it would not be surprising if a proposal is included at first in the budget proposal for the fall of 2025.