Carried interest is a performance-based compensation mechanism commonly used in the private equity and finance industries to reward fund managers. For many years, the Swedish Tax Agency (Skatteverket) has scrutinized individuals receiving carried interest, leading to extensive legal disputes taking place in Swedish courts. The outcomes of these cases have varied, but some clarity emerged following a ruling by the Supreme Administrative Court (Högsta förvaltningsdomstolen, HFD) in 2018. To further clarify the legal framework, the Swedish government has now introduced a legislative proposal aimed at the taxation of carried interest.
"If Sweden aims to remain competitive in private equity and venture capital, the legislative proposal may have the opposite effect."
How Is Carried Interest Taxed in Sweden?
The Swedish tax treatment of carried interest has historically been inconsistent, due to the ambigious legal situation governing its taxation. In some cases, carried interest has been taxed as capital income on unlisted shares at a rate of 25%. In other instances, the Swedish Tax Agency and courts have argued that carried interest should be taxed as employment income, even when it has been received by a corporate entity. Most commonly, carried interest has been subject to Sweden’s closely held company tax rules, known as the 3:12 tax regime, implying a part being taxed with capital income tax rates (20-30%), and another part with employment income tax rates (approx. 50%).
Why Was an Inquiry into Carried Interest Taxation Commissioned?
Given the inconsistent tax treatment—ranging from 20%, 25%, to over 50%—the Swedish government initiated an inquiry in the summer of 2024. The resulting report, published in early 2025, included a legislative proposal aimed at standardizing the taxation of carried interest.
What Does the Legislative Proposal Contain?
The proposal introduces specific amendments within the existing 3:12 tax regime, which govern the taxation of dividends and capital gains on shares in "closely held companies". Under the 3:12 framework, which applies to a majority of Sweden's SME segment, a portion of dividends and capital gains received by individuals is taxed at 20%, while the remainder is taxed as employment income, with progressive rates up to 55%. Any income exceeding a certain "top threshold" is taxed at 25%.
The inquiry proposes a modification to the definition of "significant active involvement"—a key concept within the 3:12 tax regime. Specifically, individuals who directly or indirectly receive carried interest from an alternative investment fund (AIF) would be deemed to have "significant active involvement", thereby making the 3:12 tax regime applicable.
Additionally, the proposal introduces several restrictive measures:
The so-called passive shareholder exemption ("utomståenderegeln") would no longer apply to holdings receiving carried interest.
The holding period disqualification rule ("karensregeln") would be extended from five to ten years, meaning fund managers would need to remain passive for a decade to exit the 3:12 regime.
The salary-based threshold rule (löneregeln), which allows salary expenses within a group to influence the 20 % tax on dividends and capital gains threshold, would be partially eliminated for carried interest structures. While salaries paid within the private equity structure itself could still be considered, salaries in subsidiaries of an alternative investment fund would be disregarded.
Analysis and Commentary
The Swedish government’s stated objective is to enhance transparency and predictability in the taxation of carried interest while maintaining and increasing Sweden’s attractiveness for private equity investments. The inquiry also aims to align carried interest taxation with the current taxation under the 3:12 tax regime.
However, the proposed legislation significantly disadvantages carried interest compared to the existing 3:12 rules. While the automatic application of 3:12 taxation to fund managers with carried interest may resolve certain enforcement issues—particularly with foreign funds structured as partnerships (e.g., Luxembourg SCSp or Guernsey/Jersey Limited Partnerships)—several aspects of the proposal raise concerns.
First, the removal of the passive shareholder exemption seems unnecessary, although it could provide better predictability which is of course something positive for the tax payer. Additionally, extending the holding period disqualification rule from five to ten years appears excessive. The rationale given is that carried interest represents substantial income and that most partners’ 20 % threshold amounts would be low relative to their returns, which would imply a higher risk of circumvention. However, designing tax rules based on assumed income levels rather than principle is questionable, espescially considering the tax principle of uniform taxation.
If Sweden aims to remain competitive in private equity and venture capital, the legislative proposal may have the opposite effect. Instead of fostering investment, these measures could drive fund managers to relocate to jurisdictions with more favorable carried interest taxation, such as:
Luxembourg, where carried interest is taxed at a flat 25%
The UK, where carried interest is taxed at 28%
France, where carried interest is subject to a 30% tax rate
If the goal is to attract and retain private capital, policymakers should reconsider these restrictions and adopt a more balanced approach to carried interest taxation.
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