Tax-transparent securities funds for institutional investors

The proposal introduces a new category of securities fund that is tax-transparent for Swedish tax purposes. The fund itself is not a taxpayer; instead, income and gains are taxed directly at investor level in proportion to their holdings. This aligns Sweden with jurisdictions such as Luxembourg and Ireland.

The new structure will take the form of a UCITS-type securities fund (Sw. värdepappersfond) and will be regulated under both the Securities Funds Act and the Income Tax Act. Tax transparency is achieved by disapplying provisions that otherwise treat funds as taxable legal persons.

Access is restricted to institutional investors, namely:

1. Swedish public bodies (state, municipalities, regions),
    
2. Foreign states and public bodies,
    
3. Life insurance companies,
    
4. Occupational pension providers,
    
5. Foreign pension institutions authorised in Sweden, and
    
6. Pension foundations.
    

The rationale is that these investors are generally tax-exempt and manage capital on behalf of the public (notably pension savings).

Consultation bodies, including the Financial Supervisory Authority, the Investment Fund Association and the Swedish Administrative Services Agency (Sw. Kammarkollegiet), advocated extending the regime to special funds (Sw. specialfonder) and other tax-exempt entities (e.g. charities). The Government declined, citing administrative complexity and less predictable treaty treatment for such investors.

Tax treatment

The new fund will not be a tax subject. Investors will instead be taxed on an ongoing basis for transactions inside the fund in proportion to their holdings, similar to a partnership structure. Transfers from the fund to investors are not dividends and carry no separate tax consequence. A fund unit in a transparent fund is not an equity interest (Sw. delägarrätt) for tax purposes; disposing of a unit is treated as disposing of a proportionate share of each underlying asset.

Share classes

A new permitted basis for share classes is introduced, classes may be differentiated by tax status and administration of tax, allowing the fund to accommodate investors subject to different tax regimes or treaties.

Transfer of units

No statutory prohibition on transfer of units is introduced; the Government concludes that fund rules will in practice restrict transfers, and that the Financial Supervisory Authority can intervene if a manager admits non-qualifying investors.

Conversion back to a regular fund

If the fund rules are changed so the fund ceases to be a transparent fund, the new rules may only take effect from 1 January of the year following Financial Supervisory Authority's approval of the change, avoiding a gap period where investors are taxed neither directly nor by way of the standard flat-rate imputed income.

Acquisition cost on conversion

A new tax rule is proposed according to which, on conversion from a transparent fund to a regular fund, the acquisition cost of the units equals the sum of the investor's cost bases for each underlying asset, so no taxable disposal is triggered by the conversion.

The proposal aims to enhance the competitiveness of the Swedish fund market by enabling domestic managers to offer structures comparable to those in established international fund jurisdictions.

However, the proposed regime is deliberately, albeit regrettably, narrow in scope. Calls to extend it to broader categories of investors or alternative investment funds were rejected on the basis that the current scope precisely targets entities that are (i) typically exempt from tax, including withholding tax, across jurisdictions, and (ii) manage capital on behalf of the public. Broadening the regime would, in the Government’s view, introduce legal uncertainty and disproportionate administrative complexity.

A notable criticism, in addition to the narrow application, is that the proposed funds would fall entirely outside the Swedish tax system. This may adversely affect access to withholding tax relief in foreign jurisdictions. As a result, while the structure is tax-neutral from a Swedish perspective, it may give rise to tax leakage at other levels, potentially undermining the intended benefits of the reform.

The proposed amendments to the Securities Funds Act and the Income Tax Act are scheduled to enter into force on 1 January 2027.