Kapitalförsäkring started as a vehicle to stimulate investment. And many Swedes have taken advantage of this rare opportunity. Capital injections into kapitalförsäkring policies by private investors have grown at annual rates of 25 to 30 percent, pouring tens of billions of Swedish kronor into the stock market each year.
And it is not only Swedes that are allowed to sign up. Any foreign citizen with a Swedish visa or EU passport living in Sweden can open an account.
Quentin Helgren, an American citizen who moved to Stockholm two years ago, opened a kapitalförsäkring policy in 2009.
“I found out about kapitalförsäkring through a friend working for a Swedish bank. And to be honest, when I signed up, I kept asking my agent what the catch was. It really seemed too good to be true, especially in Sweden of all places.”
You might think that the mere thought of not paying taxes or even provoking the Swedish Tax Agency (Skatteverket) is enough to make most Swedes shake in their snow boots, but the investment vehicle has been steadily gaining in popularity.
“At first I was afraid to tell people that I was involved with kapitalförsäkring,” Helgren says.
“I didn't want to be known as a greedy American. But the more people I spoke with, the more I realized how many people actually use this system.”
Perhaps it is not widely used by ex-pats because of the process for creating an account. Instead of opening a normal stock market trading account, investors must sign up for a life insurance policy with a licensed insurance company and trade through them. Also, most advertisements for the insurance companies are in Swedish. So if an ex-pat doesn't read Swedish publications it is unlikely that they will ever know about the system.
There are several disadvantages for investors using kapitalförsäkring policies. In addition to various administrative costs for opening accounts, investors forfeit all company voting rights to the insurance policy brokerage (although unless you plan on a hostile takeover of a publically traded company, this drawback shouldn't deter you). Also, trading losses cannot be deducted from income and dividends are fully taxed.
And there is a major loophole that the taxman is looking to close. Tax assessments are made on January 1st on the total value of the insurance policy – not the value of capital gains (the tax rate is a derivative of the government's borrowing rate and presently hovers around 1 percent). Many investors have been exiting all investment positions, emptying their accounts before January 1st, before reinvesting their funds after the tax assessment.
Legislation to close the zero taxation "loophole" is currently being considered. According to Hans Svensson of the insurance and investment company Skandia AB, which provides kapitalförsäkring services, a new bill is being drafted in the Swedish parliament that will change when the tax assessment is made. Instead of a one-time assessment on January 1st.
“It could be done monthly or weekly. We just don't know yet.”
Svensson also believes the new bill will allow consumers to trade with kapitalförsäkring policies by using a modified brokerage account provided by any company with standard investment services. By eliminating the need to open a life insurance policy, this change could make the kapitalförsäkring process much easier for consumers.
However, Swedish law states that in a national election year, no new legislation can be passed after March 23rd until the new government is formed. As such, it is highly unlikely that any changes will be enacted until 2011.
When the new government is formed, this bill will likely go through a series of debates and modifications. But investors needn't worry. This is not likely to be a top priority for a new government and a vote would be delayed through 2011, which means any changes to kapitalförsäkring would be enacted in 2012.
“In the States this type of thing would be totally exploited. Not in Sweden. I think it has to do with the Swede's introverted nature or even a sense of guilt,” says Quentin Helgren.