A feature of the Swedish model has been its potential to boost retail capital markets activity without offering any significant tax advantages to investors, a win-win situation for tax payers and national exchequers, and Sweden’s social democrat-leaning political establishment. Sweden’s more recent political shift towards the centre-right has sharpened the incumbent Government’s appetite for enhancing the regime with greater tax incentives for savers.
In its response to the European Commission’s call for evidence on SIAs the Confederation of Swedish Enterprise downplays the importance of reduced tax in Sweden’s success but champions simplifying tax. It writes in its submission, ‘Experience from Sweden suggests that investment and savings accounts should primarily focus on simplifying households access to attractive investment opportunities by minimizing administration, simplifying tax procedures... The issue of tax incentives is often raised when discussing a potential EU savings and investment account. The Swedish experience suggests that they are not necessary. Instead, simplifying the tax process is likely to be a more important factor for encouraging uptake.’
Sweden's decision to introduce a savings and investment account, the ISK, in 2012 has contributed to a strong investor culture amongst savers. In a country with a population of 10.6m people there are now over 3.5 million unique holders of ISKs.
Similarly, the Swedish Securities Markets Association (SSMA) in their submission write, ‘Our experience is that simplicity is as important as beneficial tax levels, and if both can be applied it increases the likelihood of strong adoption among retail investors. Looking at the Swedish ISK, the simplistic tax treatment where a tax is applied on the total holdings, which are reported to the tax authority by the account provider rather than by the account holder himself, has made it easier to invest from a tax declaration perspective.’
The SSMA, while welcoming the European Commission’s enthusiasm for SIAs, says that specific characteristics, including taxation, should be designed and implemented at member state level.
It also advised that the fewer the restrictions, the more likely the SIA is to be successful. ‘Looking at the Swedish ISK, there are no restrictions on: i) deposits or amount of assets, ii) geographic exposure, iii) holding period, iv) eligible assets - provided that they are (a) investment funds, (b) special funds or (c) financial instruments listed on a regulated market or corresponding outside EEA, or traded on an MTF investments, and (d) cash. This flexibility makes the account less complex, and more investor friendly.’
The SSMA also says that the aim of increasing retail participation should be kept separate from the aim of financing Europe, although it admits there is a clear link between the two. ‘By increasing retail participation, it is likely to also help finance European companies, e.g. within the defense industry and ESG, because in general there is a home bias among retail investors to some extent. Purposely steering retail investors towards, or even limiting them to, European companies might discourage them from investing.’
The SSMA also adds that long term predictability in terms of taxation is important for the trust and take up among retail investors if they are to invest long-term using an SIA.
Details of Sweden’s ISK
The Investeringssparkonto (ISK) is a savings account introduced in 2012 that can hold financial instruments, such as shares and fund units and which is taxed according to special rules. The ISK quickly gained traction among Swedish households and a report on the adoption of ISK’s from the Swedish National Audit Office (NAO) published in 2018 (six years after its introduction) states ‘the influx of money into the accounts has greatly exceeded the Government’s expectations.’
The NAO said from its introduction to the end of 2015 almost 2.2 million private individuals had opened an ISK. While there are no official statistics on the amount of assets held in ISKs the Swedish Tax Agency, based on income tax statements, estimated assets reached SEK 707 billion (c. €64 billion) in 2017. Despite the huge growth the NAO concluded in its report that taxation levels of the ISK ‘has not encouraged households’ long-term saving in directly-owned financial assets.’
More up to date figures, published by the Swedish Investment Fund Association (SIFA), estimates ISK assets in 2023 reached SEK 1,665 billion across 3.8 million ISKs in a country with a population of c.10.5 million.
An October 2024 paper from the SIFA outlines the tax treatment of the ISK up to 2024.
Under the Swedish tax system dividends and capital gains are taxed at 30 percent and capital losses are deductible against capital gains. In addition, there is a smaller standard taxation of 0.12 percent for fund holdings.
In the case of ISK, no tax is levied on dividends or realised profits when savers exchange or sell funds and shares, instead a flat rate tax is levied every year regardless of whether the savings have increased or decreased in value. Originally, the standard tax on ISKs consisted of 30 percent of the government borrowing rate. In 2016, it was decided to increase the basis for the tax to the government borrowing rate plus 0.75 percentage points, and in 2018 the basis was raised further. In 2024 the standard tax amounts to 30 percent of the government borrowing rate plus 1 percentage point while since 2016 there has been a floor for the interest base that amounts to 1.25 percent.
The tax paid on an ISK is determined in three stages: 1) the capital base, 2) the standard income and 3) the standard tax. The capital base is calculated by summing up the value of the assets in the ISK at the beginning of each quarter and adding all deposits during the income year, then dividing the amount by four. The standard income is the capital base multiplied by the government borrowing rate on November 30thof the year before the income year plus one percentage point (with a floor of 1.25 percent). The standard tax is 30 percent of the standard income.
Thankfully for ISK account holders, the ISK account provider calculates the tax liability and sends it to the Swedish Tax Agency.
They authors of the report write that the effective tax rate for savings on an ISK since the 2018 changes is estimated at just over 23%, this compares favourably to an effective rate of just under 29% for non ISK investments. It quotes the Swedish Government’s own justification for ISKs rightfully having a lower tax rate: “The Government believes that the lower effective tax rate is justified because households’ longterm savings in directly owned financial assets should be encouraged. Since savings in an investment savings account are not locked in, the form of savings can also constitute a buffer savings and offer good opportunities to save up for venture capital for your own entrepreneurship.”
However, the SIFA says that basing analysis of the ISK on effective tax rates ‘overlooks the fact that the standard taxation model that applies to ISK de facto entails a transfer of risk from the state to the individual with savings on ISK’. They quote a 2017 paper from the journal Ekonomisk Debatt, by Jacob Lundberg, Research Institute of Industrial Economics, where the author argues, ‘For the taxpayer, conventional capital taxation is an insurance against large fluctuations because the state, somewhat simplified, takes 30 percent of both capital gains and capital losses. This disappears with ISK, as taxation is then based on the size of the investment and not on its return. For the state, ISK means a smaller but more stable income stream.’
Even with the success of the ISK the Swedish Government has proposed further enhancements for ISK account holders with the introduction of a tax-free savings amount in 2025 with the first SEK 150,000 (€13,600) in an ISK set to be tax free and this level will rise to SEK 300,000 (€27,200) in 2026.
The tax simplicity of the Swedish ISK gives a blueprint for other countries, including Ireland, to follow in devising national regimes for Savings and Investment Accounts without undermining tax revenues. As such, the introduction of an Irish SIA – with simplicity for the investors at its heart and based on the principles of Sweden’s successful ISK, would benefit Irish savers, Ireland’s financial services industry and the Exchequer.