Sweden close tax loophole

Sweden will close a tax loophole used by private equity firms as the Swedish Finance Minister continues his scrutiny of the private equity industry.

Sweden’s Finance Minister, Anders Borg, will close a loophole that is being used by private equity firms to avoid paying the country tax.

The decision comes after media and tax authority investigations put a spotlight on how private equity reduced its tax payments to Sweden while becoming significant investors in healthcare and education in the country.

Anders Borg

They were concerned that private equity firms were generating profits in the tax-funded health sector while avoiding paying taxes to the state.

The Swedish Private Equity and Venture Capital Association (SVCA) played down the affect these proposals would have on investments in Sweden. “Investment activity won’t be restricted from a private equity perspective,” Jonas Rodny, SVCA spokesman, told PE Manager

However Rodny did suggest the industry would be more reluctant to structure deals relying on the deductions because of the lack of clarity surrounding the proposal. The SVCA expressed concern that there is no objective way of knowing who will be granted a reduction.

The rules, due to come into force in January 2013, are expected to increase tax revenues for Sweden by as much as SKr6.3 billion (€707 million; $897 million)as Borg commits to enforcing a tougher tax regime on the private equity industry.

The tax loophole allowed a company in Sweden to borrow money at high rates of interest from a firm in the same group. The Swedish company can then write off the interest costs – reducing its tax bill. The firm, if in a different jurisdiction, can then retain the interest payments and pay little or no tax to Sweden.
Previously Borg was criticised for being too lenient on private equity when he proposed a hybrid tax model on carried interest. 

He proposed the first SKr5 million ($740,000; €562,000) would be taxed at the standard income tax rate of 57 percent (excluding payroll tax), while anything above that would be taxed at 30 percent.

Critics argued that this was a tax break when compared to the tax authority originally plan to tax all carried interest at the standard income rate of 57 percent.