Sweden proposes higher tax on private equity profits

STOCKHOLM, March 29 Thu Mar 29, 2012 12:35pm EDT

STOCKHOLM, March 29 (Reuters) - Sweden moved to tighten tax rules for owners of stakes in private equity funds, part of a push against untaxed profits in the 250 billion crown ($37.5 billion) industry, which is the second biggest in Europe relative to economic output.

A Finance Ministry proposal aims to tax income of private equity fund owners, or so called carried interest, primarily at the income tax rate rather than the capital gains rate which is lower.

The Finance Ministry said there was a need for greater clarity in the area which would be beneficial for private equity in the longer term.

"The uncertainty around how this income should be taxed has led to a situation which in the future could be harmful for this kind of economic activity," the Ministry said on Thursday in a note accompanying its proposal.

While much of Europe has seen restrained private equity activity recently, Sweden and the rest of the Nordic region have been having a bit of a boom as the countries have suffered less from the sovereign-debt crisis.

But profits made by private equity firms in Sweden, the home of social democracy, have raised eyebrows.

The government, in the hands of the centre-right but sensitive to allegations it favours bankers, has already moved recently to close other private equity tax loopholes after scandals related to private equity in the tax-funded healthcare sector.

The latest move against carried interest targets arrangements which typically entitle private equity partners to a share of profits from a fund. In much of Europe, carried interest is treated as capital gains and is subject to lower tax rates than wages.

The issue hit the spotlight in the United States during the Republican presidential primaries, when front-runner Mitt Romney's low-tax private-equity payouts were castigated by opponents.

The new Swedish rules include a statute meaning any person who through a broad range of vehicles, including trusts, owned stakes in private-equity firms would be taxed on dividends and profits as if the stake was owned directly by that person.

Dividends and profits by private-equity partners would be first taxed as income from employment up to a ceiling, after which the remainder would be taxed as income from capital, at a lower 30 percent tax rate, the ministry said.

The regulations, which if passed by parliament would come into force at the turn of the year, cover private equity funds that acquire, manage and divest shares in unlisted companies and where their stake at any point amounted to 50 percent or more.

Late last year local media reported that tax authorities had landed the founder of private equity firm IK Investment Partners with a tax bill of almost 1 billion crowns ($149.7 million).

The proposal has been sent out for comment to various government instutions, including the private equity lobby. ($1 = 6.6818 Swedish crowns) (Editing by David Holmes)

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