In recent times, the taxation of so-called Carried Interest in Sweden has been a highly debated topic. The issue gained further attention in early 2025 when a government inquiry presented proposals for legislative amendments. Now, the Administrative Court of Appeal in Stockholm has ruled on a case concerning the taxation of Carried Interest—where the Swedish Tax Agency emerged victorious. The court’s reasoning is both surprising and, in some respects, concerning.
What is Carried Interest?
Carried Interest is a form of performance-based compensation used in private equity and real estate funds. Fund managers receive a share of the investment returns, often through specific classes of shares or other “asymmetrical” profit allocations within the company.
In Sweden, the taxation of Carried Interest has been a contentious issue for many years.
The Swedish Tax Agency has argued that such income should be classified as salary, while fund managers have maintained that it constitutes capital income. The Supreme Administrative Court has previously ruled on specific cases, but a uniform and clear resolution has yet to emerge.
The government inquiry on Carried Interest, published in early 2025, proposes changes to the 3:12 rules, explicitly incorporating Carried Interest within their scope. The inquiry assumes that the income should be deemed received by the fund managers’ own companies, in line with established tax law practices in several previous cases.
Case Background
The case before the Administrative Court of Appeal concerned a real estate fund established by several Swedish individuals from the real estate sector. The fund was structured as a Swedish limited liability company and invested in a large property in Gärdet, Stockholm. The structure resembled that commonly used in private equity funds, where part of the fund managers’ compensation consisted of Carried Interest.
Case Structure
Advisory Company – Owned by the fund managers through their personal holding companies.
B-Shares in the Fund – Owned by the advisory company and entitled to Carried Interest.
A-Shares in the Fund – Owned by a passive investor and entitled to priority dividends.
Services – The advisory company provided consulting services to the fund.
The fund was governed by a shareholder agreement regulating the terms for different share classes and the rights of the shareholders.
The Swedish Tax Agency’s Argument
The Swedish Tax Agency argued that Carried Interest in this case should be classified as salary because:
The compensation, according to the Tax Agency, was a direct result of the fund managers’ work.
The fund managers, through their work, had secured the right to acquire B-shares in the fund.
The disproportionate dividends on the B-shares indicated that Carried Interest was compensation for work rather than a return on capital.
In addition to imposing significant taxes, the Swedish Tax Agency also levied tax penalties, and the fund was likely held liable for employer contributions.
The Fund Managers’ Objections
The fund managers and their legal representatives argued that:
The Carried Interest had been received by their companies, not by them as individuals.
Swedish tax law recognizes the possibility of receiving compensation through a company, for example, under the 3:12 rules.
Taxation should therefore be applied at the company level, not as salary for the individuals.
They maintained that Carried Interest was part of their companies’ business operations and should be taxed under the corporate tax regime.
The Court’s Ruling
The Administrative Court of Appeal fully sided with the Swedish Tax Agency, concluding that:
The fund managers had contributed their expertise and labor to the fund.
Their contributions were a prerequisite for their acquisition of B-shares in the fund.
The shareholder agreement demonstrated that the individuals were crucial to the fund’s success.
The dividends on the B-shares were disproportionately high compared to the A-shares, indicating that they constituted compensation for work rather than a return on capital.
As a result, the court ruled that the income should be taxed as salary (earned income) for the fund managers personally.
Analysis: Taxation of Carried Interest and Fundamental Tax Principles
The Administrative Court of Appeal in Stockholm has, in this ruling, chosen to disregard the civil law treatment of carried interest, where the compensation was paid out as dividends to a company rather than as salary to the fund managers personally. Under Swedish tax law, the general rule is that taxation should follow the civil law framework—a principle the court has deviated from in this case. At the same time, there are situations where the nature of income must be assessed from a tax law perspective, particularly regarding the classification of income for individuals as either employment income, capital income, or business income.
For companies, however, a different framework applies. A company can only be taxed under the category of business income, and reclassification of income based on its origin is generally not done for corporate entities. Nevertheless, case law exists where the Supreme Administrative Court has chosen to tax a subject other than the civil law recipient of a particular income. However, there is no explicit statutory provision allowing such an approach, which may be considered contrary to the principle of legality in Swedish tax law.
It is undisputed that carried interest can, at least in part, be regarded as compensation for the fund managers' work. At the same time, it has long been established that there are no tax law obstacles preventing a Swedish company from receiving taxable income based on its owner’s personal work efforts. In Sweden, there are likely hundreds of thousands of companies generating income due to the owner's work, primarily in the form of consulting firms.
The fact that Sweden has applied the so-called 3:12 rules for decades, designed to prevent income shifting from employment income to capital income, clearly demonstrates that the principle of using a corporate structure for tax purposes is recognized. If this were not the case, the 3:12 rules would not have been necessary.
Against this background, it is remarkable that the Administrative Court of Appeal in Stockholm entirely disregards the entity that actually received the income. If the owner companies had received carried interest solely based on contractual grounds, there would have been a different situation. However, since the dividend was distributed in accordance with the Swedish Companies Act, the court’s reasoning appears overly far-reaching, particularly given that it fails to substantiate its assessment with any legal source.
The government inquiry on carried interest taxation, published in early 2025, assumes that carried interest should, from a tax law perspective, be considered received by the corporate entity. This is a fundamental premise for both the inquiry and the forthcoming legislative proposal. That the Administrative Court of Appeal in Stockholm chooses to disregard this premise, without citing any legal source, and thereby imposes substantial taxes and tax surcharges, is therefore highly remarkable.
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