Swedish minister for finance attacks private equity tax shield

The Swedish Moderate Party (M) politician was quoted in local media saying: "We currently have private equity firms, active in education and health care, using capital structures to evade taxation in Sweden, and instead sending tax money to the Cayman Islands and similar tax havens. It is simply unacceptable. We have to stop that."

Borg added that a current government inquiry into corporate tax, which will be presented in early 2012, will look into a possible restriction of tax deductibility on interest payments for private equity portfolio companies.

Marie Reinius, CEO of the Swedish Private Equity and Venture Capital Association (SVCA) sees Borg's statement as populist and misdirected, and added that "tax deductions on interest payments are not unique for the private equity industry. It is common practice for foreign investment of capital in Sweden. If the government plans new rules for corporate taxation, these need to apply equally to all industries and all forms of ownership."

Reinius interprets Borg's statement as a signal for new rules being proposed in the corporate tax inquiry, but believes that they would have a limited effect on Swedish private equity firms. She predicts that funds would still attract investment from abroad and that buyout activity would remain largely unaffected.

When asked where the tax money would go, Borg referred to a venture capital tax deduction being investigated in the government inquiry. This has been debated several times in Swedish politics over the last few years, but according to Reinius it would likely be for retail investors only and capped at a low level, only suitable for the earliest rounds of seed capital. "In order for such a deduction to be effective, it would need to be sufficient in scope."

Whether new rules would have an effect on the industry remains to be seen, but it is hard to see how it would reduce the alleged tax flight.

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