Sweden to treat carry as ordinary income

The Swedish government has proposed to tax carried interest as ordinary income up to a ceiling, beyond which it will subject to a lower 30 percent capital gains rate.

According to a draft sent to government departments and the private equity lobby for comment, dividends and profits accruing to private equity managers would be taxed as ordinary income from employment up to a threshold of just under SEK 5 million (€570,000; $750,000), with the remainder charged at the current capital gains rate of 30 percent.

The proposals are very similar to those put forward by the Swedish Private Equity and Venture Capital Association (SVCA), which has on behalf of the private equity industry been trying to reach a compromise deal with the authorities on carry tax.

“Even though this will increase the total tax private equity firms pay, it will be beneficial in the long-term as there will be more certainty on how this income is taxed going forward,” said Jonas Rodny of the SVCA.

Rodny said engaging with the government on the issue has been central to a positive outcome for the industry. “There is a tradition in Sweden of dialogue between lawmakers and those hit by the laws. We are very happy with the outcome,” he said.

The changes, which if passed by parliament would come into effect on 1 January 2013, apply to funds that acquire, manage and dispose of shares in unlisted companies where the holding has at any time been 50 percent or higher, the ministry said in a note accompanying the announcement.

The Swedish private equity industry is the second largest in Europe as a percentage of GDP, employing around 180,000 people in 2010 and with total turnover form portfolio companies of SEK 250 billion, said the ministry.

Under the glare of local media angered by private equity profits in tax-funded social sectors like healthcare, elderly care and education, the Swedish authorities have been mulling changes to the industry’s tax rules for the last few years.

Investigations into some of Sweden’s leading firms have led to large penalties for both Nordic Capital and IK Investment Partners, although both are appealing the verdicts.

Last month the government closed a $1 billion tax loophole that was being used by private equity firms, among others, to write off their portfolio companies’ interest payments. Finance minister Anders Borg said Sweden would not let private equity firms “escape their social responsibility”.