Sweden is to close a loophole used by private equity groups and others to avoid tax, the government said on Friday, provoking criticism from the main business lobby.

The private equity sector in Sweden, home to EQT and Nordic Capital, is the second biggest in Europe relative to gross domestic product (GDP), at 250 billion crowns ($34.91 billion), about 7 percent of output.

However, the centre-right government has sought a crackdown on private equity firms after media and tax authority investigations showed them using tax rules to reduce their bills to the state at the same time as they make profits in the tax-funded health sector.

"The proposal means an efficient limitation of aggressive tax schemes," Finance Minister Anders Borg said. "We are closing the possibility to use tax havens."

Borg told a news conference that he expected the new rules to come into effect in January 2013 and boost annual tax revenues by 6.3 billion crowns ($880 million).

The Confederation of Swedish Enterprise, the largest business lobby, was critical of the plans and accused the government of populism. "The model the government is now proposing will unfortunately worsen the predictability companies need when deciding on investments in Sweden," lobby chief Urban Backstrom said in a statement.

The new rules will stop a scheme whereby a company in Sweden borrows money at high rates of interest from a firm in the same group in a tax haven. The Swedish entity can reduce its tax bill by writing off the interest costs, while the overseas entity retains the interest payments and pays little or no tax.

Borg estimated that Sweden loses 20-30 billion crowns in tax revenues through the loophole.

"We have seen that private equity firms (in the welfare sector) have had very aggressive schemes and they have accounted for a fairy large share of these schemes," he said.

Private equity firms have become major players in running healthcare and education facilities, a trend that has prompted criticism that the welfare system is being undermined. The centre-left opposition says that any profits from tax-funded welfare activities should be ploughed back into the system.

Swedish Private Equity and Venture Capital Association spokesman Jonas Rodny said the association would have preferred that the impact of the proposed rules had been examined further but played down the impact on investment. "The important thing for us is that the rules are stable and competitive internationally," he said.

The government plans to use the tax revenues generated under the new rules to finance a corporate tax cut, to be included in the 2013 budget proposal. ($1 = 7.1603 Swedish crowns)

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