Are we finally about to see a clear legislation on carried interest?

After over a decade of processes and built-up frustration within the industry and among tax advisors, the investigation proposal on carried interest is finally here. And perhaps a sigh of relief can be heard from some corners. An investigation with proposal for new legislation concerning the taxation of certain returns from private equity funds, i.e., the taxation of carried interest, was published on Tuesday, January 28th. In summary, the investigator has managed to create clarity in several areas, a clarity that has been long-awaited. So, what does the proposal contain and are there any pitfalls? 

The instruction for the assignment, initiated in the autumn of 2024, was simply to propose provisions that lead to predictable taxation of carried interest, corresponding to the taxation that occurs under the Swedish closely held company rules. The closely held company rules were initially introduced in 1990 to avoid what is essentially earned income being converted into lower-taxed capital income. Shareholders covered by the closely held company rules are therefore taxed progressively (20 – 54 percent) for dividends and capital gains from the company, provided that the disputed passive investor exception is not applicable, in which case income is taxed at 25 percent.

In line with the assignment, the investigator proposes that four new provisions regarding the taxation of carried interest be introduced into the closely held company rules. These special provisions will partly differ from the taxation of dividends and capital gains from "ordinary" closely held companies, i.e., the new provisions are only intended to cover income derived from carried interest. The bill is proposed to come into force from 1 January 2026. In short, the following provisions are proposed for shareholdings that grant carried interest:

• The criterion of active to a significant extent is given an expanded meaning 
  Instead of the assessment being based on the shareholder's, and related parties', actual work effort and impact on the company's profit generation, the shareholder's shares will be considered qualified (and thus covered by the closely held company rules) if the company directly or indirectly has a right to receive carried interest. This means that the closely held company rules are applicable as long as the right to carried interest exists – regardless of the actual activity of the shareholder.
• The passive investor exception is not applicable to holdings that entitle carried interest 
  A codification of what could be inferred from case law is made by introducing a new provision that limits the possibility of applying the outsider rule in structures where carried interest is received.
• The dormant period rule is extended to ten years 
  According to current rules, shareholders who cease to be significantly active can disqualify their holdings and be taxed at 25 percent after five full years of a dormant period. This period is proposed to be increased to ten years for shareholders who have received carried interest. Interestingly, the dormant period for "ordinary" closely held companies is proposed to be reduced to 4 years.
• The consideration to salary costs in subsidiaries is limited 
  As an effect of the discussion on the proportion between the right to use the salary base amount in subsidiaries and risk-taking, the investigator proposes that a limitation be introduced in the possibility of using salary costs in structures where carried interest is present. The limitation means that salary costs in subsidiaries owned by an alternative investment fund cannot be included in the calculation of the shareholder's low-taxed threshold amount.
• Potential increase of the cap amount to 150 income base amounts 
  The cap amount is the part of the dividend/capital gain that is maximally taxed as earned income. For "ordinary" closely held companies, the cap amount today is 90 vs 100 income base amounts (corresponding to SEK 7,254,000 for dividends and SEK 8,060,000 for gains in 2025). Here too, certain reliefs are proposed for "ordinary" closely held company owners, while a stricter application is proposed for active shareholders within the private equity industry.

As mentioned above, it is positive that clear rules are introduced for the taxation of carried interest and that these are incorporated under an existing regulatory framework, instead of a completely new separate and industry-specific regulatory framework being introduced. In many ways, the rules become easier to apply, increased predictability is created, meaning it is easier to adapt to the rules to ensure a certain tax outcome, and the lack of logic that has prevailed regarding tax outcomes will hopefully cease. At the same time, it can be noted that the provisions now proposed still mean special regulations for a certain, specific industry. The taxation becomes in many respects tougher, at least for existing AB funds where, for example, the salary base can be used today and for shareholders with smaller shareholdings/capital flows. That said, the special rules to be introduced for just carried interest raise certain questions and considerations.

A contentious issue that has been the subject of process historically is whether carried interest paid to companies can be seen as private earned income for the shareholder. This is because the Swedish Tax Agency has had a clear opinion that carried interest is income based on personal work effort that can only exceptionally be taxed in the corporate sector (the courts have somewhat agreed). Often, the path to the goal of earned income taxation has been fragmented, and in some cases, there has been a lack of legal logic in the assessment (read more about this in our article here). In some cases, the fact that shares are not qualified in a closely held company that receives carried interest has resulted in earned income taxation for the owner of the closely held company without any funds being distributed, i.e., corporate income has been converted into earned income. The investigator notes that the correct tax subject for an income should be based on the civil law assessment, i.e., who is considered civilly to be the owner of the asset that generated the income. The investigator also notes that it is entirely possible to conduct business through companies even if the revenues are based on the shareholder's work effort. Only in exceptional cases, such as for example for board fees where the fee itself is based on an assignment that is purely a personal assignment under company law, is there reason to disregard the intermediary company and tax the shareholder privately.

By incorporating the taxation of carried interest under the closely held company rules, a reclassification of corporate income to private earned income should be avoided in the future. The investigator concludes, however, that he does not intend to interfere in ongoing processes and that the above reasoning should only be seen as forward-looking when interpreting upcoming legislation. The question therefore arises to what extent the investigator's statements on how tax principles should be interpreted will have an effect in the current legal order and ongoing processes? Presumably, the chances of success with such arguments are small.

Another aspect is that the investigator does not completely close the door, through clear legislation, to the taxation of carried interest as earned income. This potentially leaves an opening for the Swedish Tax Agency to continue to pursue processes on earned income taxation of corporate income derived from carried interest. Given the statements and comparisons made in the investigation, the Tax Agency's ability to disregard companies as the correct recipient of the income should be strongly limited unless the real meaning of the structure is something else. Discussions about real meaning tend to become complex and expand a now proposed system that otherwise aims to offer simple legal application. Considering this, a clear stance from the legislator in this regard would have been the best to completely close the door to distorted interpretation.

Regarding the expansion of "active to a significant extent", i.e., that the right to carried interest itself means that the shares are qualified regardless of work performance or the shareholder's importance for profit generation, the expansion should mean a significant simplification of the assessment in many cases. At the same time, the expanded definition means that shareholders are considered active as long as the right to carried interest continues. This, combined with an extended dormant period of ten years, means that shareholders will be covered by the closely held company taxation for a very long time compared to what applies to "ordinary" closely held companies. For those active in the private equity industry who work until regular retirement age and continue to have the right to carried interest for several years thereafter (which is not uncommon), they may need to reach an age of (for example) 80 before a disqualification of the shares is possible.

A positive aspect is that the investigation does not at all address the discussion that has been ongoing in case law about how carried interest should flow in private equity structures and how ownership should be structured. The fact that the investigator does not address this case law cannot be interpreted in any other way than that the payment flow for carried interest, i.e., whether carried interest is repatriated via the General Partner or the advisory company, and the requirement for direct or indirect ownership in the General Partner is irrelevant for the applicability of the new rules. Instead, it seems sufficient with indirect ownership in the fund, and it does not appear necessary that the indirect ownership consists of shares (for example, indirect ownership in Limited Partnerships (LP) seems to be okay). If the requirements for payment flow and ownership that have emerged in case law had been codified, it would have meant unnecessary complexity and opened up for interpretation. 

That the new rules should not apply to direct investments in LPs seems clear. However, it seems to be equally clear that it is sufficient to own LP shares via one's own holding company for carried interest to fall within the scope of the proposed rules. Should the bill come into force in its current form, it will most likely result in direct ownership in LPs being avoided and consideration for restructuring current structures with direct ownership in LPs. 

According to the proposal, carried interest should be defined as a right to a share of the profit in, or concerning, a fund referred to in the Act on Managers of Alternative Investment Funds (LAIF) if the profit more than insignificantly exceeds the shareholder's share of committed capital. According to the investigator, the definition aims to limit the applicability of the new rules to only cover the private equity industry. Here it would have been appreciated if the investigator and the bill had clearly concluded that the provisions should only apply to companies operating within the private equity industry and attempted to define what constitutes private equity. The background to this is that the Swedish Tax Agency in several processes has claimed that carried interest occurs in real estate management company structures as a result of the presence of shares with different dividend rights, despite these activities in many ways differing from the private equity industry. Here it will be interesting to see if the Swedish Tax Agency will continue to pursue processes on earned income taxation of what they consider to be carried interest in, for example, real estate management companies. If the bill is implemented, with the definition of carried interest as stated, one might think that the Swedish Tax Agency should refrain from maintaining that a dividend right according to the articles of association that does not correlate with committed capital in industries other than the private equity industry should be considered carried interest. Unless the investigator means that the existence of different types of shares with different dividend rights, regardless of the company's industry and activity, should be considered special reasons against applying the passive investor exception (regardless of any carried interest)?

The potential increase of the cap amount to 150 income base amounts per year for dividends and capital gains derived from carried interest is proposed to cover the loss of tax revenue that the bill would entail according to the investigation. The introduction of a special cap amount for private equity investors would thus be a way to finance what the investigator believes will be lost in tax revenue due to the new legislation. In this context, it should be noted that the cap amount was introduced in the closely held company rules to create a boundary in what should reasonably be seen as a return on work effort rather than capital. For many smaller players in the private equity industry, or shareholders with smaller shareholdings, an increased cap amount of the proposed size will hit extremely hard. It can be questioned whether the private equity industry should be treated differently from other entrepreneurs in this regard, and at least whether the special treatment is proportionate based on the purpose of the closely held company rules. The tax revenues that have accrued due to the processes driven by the Swedish Tax Agency have largely lacked legal support, and the question should be asked whether these tax revenues should have accrued to the state in the first place.

To summarise, the proposal is clear in many parts and should therefore indicate that the question of how carried interest should be taxed can finally be resolved. The proposal also means that no private taxation of carried interest before the income reaches the individual should occur after the new rules come into force. The distorted logic that has prevailed, with high uncertainty in tax outcomes and without support in legal principles, may finally fall into historical oblivion. Now only the political debate and final decision on the introduction of new legislation remain before the fate of carried interest can be decided.

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Lina Thörn 
Partner
lithorn@deloitte.se
+46 70 080 33 49

Ana Jagunic
Assistant Manager
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+46 70 080 29 08