The Swedish Tax Council ("Skatterättsnämnden") has recently published an advance ruling regarding the taxation of so-called "carried interest." The issue concerns the classification of the income itself, specifically whether carried interest received by a holding company should be taxed as income from employment for the individual fund manager, or if the holding company can receive carried interest with tax effect.
What is carried interest?
Carried interest is a type of compensation that fund managers of investment funds receive as a fee. It is often said that carried interest is awarded on an asymmetric basis, as fund managers typically invest less money in the fund compared to external investors, yet receive a larger share of the profit, depending on the fund's yield. In Sweden, there has long been uncertainty about how carried interest should be taxed. In some cases, carried interest has been taxed as employment income for the fund manager, while in other cases, it has been accepted that the fund manager's own holding company receives the funds, with taxation then occurring under the so-called 3:12 rules - a tax regime that enables dividends and capital gains to be taxed with employment income tax rates (30 - 55 %).
What is the advance ruling about?
In recent years, the Swedish Tax Agency ("Skatteverket") has argued in several cases that individuals should be taxed under the income category of employment for carried interest received by their holding companies. This was one of the key issues the Swedish Tax Council had to consider. The Swedish Tax Council concluded that, provided the dividends were distributed symmetrically — meaning that all shareholders with the same class of shares would be entitled to the same dividends — the income would not be taxed as personal income for the fund manager.
Given this ruling, there may be good reason to request a re-assessment of the Swedish Tax Agency's decision if a fund manager has been taxed as employment income for carried interest received by their company. At nomadtax, we can assist with such a request for a re-assessment.
Does the advance ruling affect how carried interest is taxed?
The ruling is a setback for the Swedish Tax Agency, which has consistently maintained that carried interest should be taxed as employment income for the fund manager personally. Now, there is support for the opposite position. However, a case-by-case analysis is required, as several factors influence the assessment of carried interest taxation.
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