Sweden Rules on Taxation of Carried Interest in Private Equity Structures

Tax Alert


Sweden's Administrative Court of Appeal (SACA) has issued a decision on the taxation of carried interest in a number of private equity structures. In most of these structures, carried interest was taxable at least partly as employment income of the partners/employees, thus taxable at the higher marginal income tax rate of the partners/employees.

Key Features

The cases decided by SACA on April 27, 2017 concern a common type of private equity structure in which investment professionals are employees in a Swedish limited liability company, which provides advice to the general partner in a private equity structure in return for an arm's length fee. These professionals invested in an initial limited partner used to finance part of the investment in an underlying fund, giving them the right to receive some carried interest. The carried interest at stake is the 20 percent share that the initial limited partner derives from the investment after the limited partners' share of 8 percent hurdle interest. The issue at stake in the SACA decision is whether the carried interest is taxable in the hands of the Swedish investment professionals as employment income because they are employees of the Swedish limited liability company (thus taxable at their marginal personal income tax rate), or whether it is taxable as capital income of the limited liability company.

The SACA decision noted that since all the individuals involved had different functions, and the funds in which they were involved were different, with various ownership structures, the outcomes are also different for the cases considered. In five of these cases (Altor, EQT, Litorina, Segulah and Triton), carried interest was partly taxed as income from employment (and partly as capital gain), while in two cases (IK and Nordic Capital) carried interest was fully taxed as income from employment for the majority of the individuals involved.

In essence, the SACA took a substance over form approach to determine the commercial arrangements in the context of a closely held company. Instead of examining the legal arrangements, the SACA found that the holding of the investment professionals in the initial limited partner qualified as a closely held company. As such, income derived by the investment professionals from their share in the initial limited partner employees could be bifurcated between salary and capital income.

Related developments in Europe

The Swedish development follows Finland's Supreme Administrative Court (SAC) ruling on the tax treatment of carried interest, in which the SAC decided that carried interest should be taxed as investment income rather than employment income. Other countries in the Nordic region, such as Norway and Denmark, are also grappling with the same issue.

In the same week, Italy clarified, by way of Article 60 of Law Decree no. 50 of 24 April 2017, that carried interest qualifies as financial income rather than income from employment when embedded into units of undertakings for collective investments (UCIs), shares or financial instruments issued by companies having “reinforced financial rights” provided that certain conditions are met. The new Italian law allows carried interest that meets the requirements to be taxed at 26 percent instead of the marginal tax rate (typically 43 percent for such investors). The preferential tax rate applies only to qualifying beneficiaries of qualifying entities where all the managers/employees hold at least 1 percent investment in the underlying funds; payments of the carried interest shall only be made once the other investors or the shareholders have received sums at least equal to the overall investment plus a pre-determined return to be set in the UCI’s regulations or in the company’s bylaws, and the investments must be held for at least five years.


Private equity structures are complex and tax authorities are unlikely to stop their attempts to tax carried interest at the higher marginal tax rates. Investors in private equity structures need to consider carefully the tax treatment of carried interest on a case-by-case basis. The taxation outcome may vary depending on a number of factors: the countries in which the investors are resident; the characteristics of the funds; the companies’ ownership structure; and the functions of the individuals involved.