The tax and legal environment in Sweden is a traditional civil law system, based on statutes rather than case law. However, since joining the European Union on 1 January 1995, case law has become an increasingly important part of the legal environment. Sweden has, as of 1 January 2019, a flat rate of 21.4 per cent corporate tax (expected to be lowered to 20.6 per cent as of 1 January 2021), a generous participation exemption regime and one of the most extensive tax treaty networks in the world.
Foreign investment in Sweden is promoted by the government through, inter alia, the Invest in Sweden Agency and the Swedish Trade Council, which seek to assist foreign enterprises interested in investing or conducting business in Sweden.2
Sweden has no foreign exchange controls and no currency restrictions. As a general rule, there are no requirements to obtain an operating licence to conduct business in Sweden (exceptions in specific sectors do apply). Enterprises must, however, register for tax, etc.
This chapter contains an overview of certain Swedish tax rules regarding companies, and to a limited extent the taxation of foreign legal entities in Sweden. The descriptions are not exhaustive.
This chapter does not cover the taxation of natural persons.
II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT
The vast majority of organisations for commercial activities in Sweden are organised as limited companies. Limited companies may be public or private. Only public companies may turn to the general public to raise capital. To a limited extent, cooperative economic organisations are also used for commercial activities.
The share capital of private companies must total at least 50,000 kronor (there is currently a proposal to lower the minimum amount to 25,000 kronor as of 1 January 2020), while share capital of public companies must be at least 500,000 kronor.
Limited liability companies and cooperative economic organisations constitute tax subjects, and are subject to national income taxation scheduled as business income (lowered from 22 per cent to 21.4 per cent as of 1 January 2019 and expected to be lowered to 20.6 per cent as of 1 January 2021).
Organisations for commercial activities may also be organised as partnerships, limited partnerships or unregistered partnerships. Unregistered partnerships are seldom used for sizeable commercial activities.
Partnerships and limited partnerships are, unlike unregistered partnerships, legal entities that can acquire assets and assume rights and liabilities.
The partners in a partnership have unlimited liability for the debts of the partnership, while in a limited partnership, only the general partner retains unlimited liability for the partnership's debts. The limited partners' liability is limited to their financial contribution to the company.
Partnerships are, from an income tax perspective, transparent, but may be liable to VAT, real estate tax, payroll taxes and taxes on pension costs for employees. In addition, partnerships may be responsible for handling social contributions and for withholding preliminary income tax for employees.
III DIRECT TAXATION OF BUSINESSES
i Tax on profits
Determination of taxable profit
The profit or loss of a limited company is (somewhat simplified) as a general rule calculated in accordance with Swedish generally accepted accounting principles. To determine the taxable result, certain tax adjustments are made; these include transfers to and from certain untaxed reserves, group contributions with fiscal effect, and non-taxable and non-deductible income and costs, as specified in the Income Tax Act. Examples of non-taxable income include dividend distributions and capital gains covered by the relevant participation exemption rules and write-ups on financial assets. Examples of non-deductible costs include general taxes, write-downs on financial assets, certain interest expenses, association fees and, in principle, all business entertainment.
Furthermore, depreciation of machinery and equipment and real property is subject to special tax rules. A deduction for depreciation of machinery and equipment is allowed at an annual rate of 20 per cent of the original acquisition cost or 30 per cent of the remaining non-depreciated value. An alternative 25 per cent declining balance method without correspondence to the books also exists. These rules also apply to the depreciation of, inter alia, concessions, patents, licences, trademarks, leases, acquired non-share-related goodwill and similar rights acquired from another party.
In respect of real estate, deductions for depreciation of buildings are allowed at various rates between 2 and 5 per cent annually, depending on the type of building. For new rental buildings, an additional 2 per cent per annum may, as of 1 January 2019, be deducted over the first six years. Land is a non-depreciable asset.
Capital and income
Income earned by a limited company is subject to a national corporate income tax rate of 21.4 per cent (expected to be lowered to 20.6 per cent as of 1 January 2021). The tax rate is applicable to all taxable income, including capital gains (tax-exempt gains exist: see Section V). Income earned by a partnership, including capital gains, is taxed at the level of its owners, and the tax rate is dependent on their tax status.
Tax losses are as a main rule carried forward indefinitely (no carry-back exists) and may be offset against any taxable income. However, losses on real estate and shares not tax-exempt under the participation exemption regime may only be offset against gains on the same type of assets.
Losses carried forward may be restricted following a direct or indirect change of control of a company. Where there are such changes, an amount limitation rule implies that all tax losses carried forward exceeding 200 per cent of the purchase price are permanently forfeited. For the purpose of this calculation, the purchase price must be reduced by capital contributions made to the loss company during the current and two financial years preceding the change of control.
Under an offset restriction rule, tax losses carried forward that are not forfeited by the application of the amount limitation rule cannot be offset against profits in any company belonging to the buyer's group during the year in question and for five years following the year of acquisition. The offset restriction applies not only to an acquisition of a company with losses carried forward, but also when a group containing such a company acquires another company.
When the change of control concerns companies that prior to the change of control were in the same group, the offset restriction rule is normally not applicable. Furthermore, the amount limitation rule is normally not applicable when a controlling company, prior to the change of control, was in the same group as the loss-carrying company.
The above described amount limitation rule may also be applicable in mergers unless the absorbing company has the decisive influence over the dissolved company. Furthermore, unless the companies are entitled to exchange group contributions with fiscal effect the year prior to the merger, the losses carried forward that are not forfeited as a result of the application of the amount limitation rule cannot be utilised against the absorbing company's own profits or against group contributions during the year in which the merger is completed and for five subsequent years (merger restriction).
As noted above, income earned by a limited company is subject to a national corporate income tax rate of 21.4 per cent (expected to be lowered to 20.6 per cent as of 1 January 2021). Income earned by partnerships is taxed at the level of its owners.
Limited liability companies normally pay income tax on a monthly basis based upon a preliminary declaration of income. After the close of the book year, the company submits a tax return to the Swedish Tax Agency that establishes the company's final income tax for the year. The filing date is dependent on when the book year ends.
|Book year ending||Filing date|
|31 January, 28 February, 31 March or 30 April||1 November, if filed on paper; 2 December, if filed electronically|
|31 May or 30 June||15 December, if filed on paper; 15 January, if filed electronically|
|31 July or 31 August||1 March, if filed on paper; 1 April if filed electronically|
|30 September, 31 October, 30 November or 31 December||1 July, if filed on paper; 1 August if filed electronically|
The Tax Agency's decision regarding income tax may be appealed to an administrative court. Such an appeal should be sent to the Tax Agency, not the court, at which point the Agency will make an obligatory reassessment of its decision. If the Agency does not find a reason to overturn its decision, the appeal will be forwarded to the court.
The administrative court's decision may be appealed to the administrative court of appeal. The administrative court of appeal's decision may then be appealed to the Supreme Administrative Court. For the Supreme Administrative Court to hear the case, a review dispensation is required, because the Supreme Administrative Court establishes precedent and generally only hears cases in which the appeal is important as guidance for the application of the law.
Tax subjects may ask the Tax Agency for a written response to tax questions. Such written responses are not formally binding. However, according to the Tax Agency, it is intended that it will treat them as binding provided that the tax subjects involved have provided all relevant information and are not using the answer for tax planning purposes, and unless the Supreme Administrative Court delivers case law demonstrating that the Tax Agency's interpretation was wrong.
The Swedish tax system also provides for the possibility to obtain a formally binding advance ruling regarding a specific tax question. Such a ruling is delivered by the Council for Advance Tax Rulings, an independent public authority. Both the Tax Agency and the taxpayer may appeal the advance ruling to the Supreme Administrative Court without review dispensation.
The statute of limitation for the Tax Agency to review taxpayers' tax returns is normally six years, but can in most situations be shortened to two years by filing open disclosures.
On 15 January 2019 the government presented a report (SOU 2018:91) on the possibility to introduce a requirement to provide information regarding tax arrangements in Sweden. During the investigation that led to the report, Council Directive (EU) 2018/822 of 25 May 2018 amending mandatory Directive 2011/16/EU on mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (DAC 6) was adopted. DAC 6 came into force on 25 June 2018 and entails an obligation for Member States to impose rules with an obligation to provide information regarding certain cross-border arrangements in the tax area. It also imposes an obligation on Member States to exchange information on such arrangements with one another automatically. The report includes proposals to implement DAC 6 in Swedish law. However, the proposed regulations in the report go beyond what follows from DAC 6 in that they also include purely domestic arrangements. The report suggests that the proposed rules come into effect on 1 July 2020. The report was subject to a consultation round that ended on 24 April 2019. The consultation answers were generally, with one exception (Swedish Tax Agency), critical to the proposed rules. It has consequently been speculated within the legal community that the domestic part of the proposal will not be enacted as is because of the criticism, but no such indications have yet been provided by the government. We are currently awaiting a proposal to the 'Council of Legislation', which is the next preparatory step, prior to a government bill being created and submitted to the Swedish parliament for a vote. Until such a bill is presented, it is difficult to draw any conclusion regarding the Swedish implementation of DAC 6.
Consolidated balance sheets are not recognised for tax purposes in Sweden. Instead, a tax consolidation system is used (i.e., a method of group contributions with fiscal effect between companies within the same corporate group where the ownership chain exceeds 90 per cent of the share capital). When these rules are applied, transfers of taxable income within an affiliated group are enabled. The group contributions are taxable in the receiving company and tax deductible in the paying company, which means that taxable profits can be shifted to a loss company in the same group to be offset against the tax losses.
The group contributions require that there are enough distributable reserves in the providing company, as group contributions are considered dividends for company law purposes. In profitable companies with no negative equity, this should not present a problem as long as no more than the yearly profit is contributed.
ii Other relevant taxes
The Swedish VAT system is harmonised with the EU rules. A general VAT rate of 25 per cent is chargeable on most goods and services. Reduced rates apply to a few goods and services, such as foodstuffs, restaurant meals, and non-alcoholic or low-alcohol drinks (12 per cent), as well as to the transport of passengers, books, newspapers and most cultural events (6 per cent). Most financial and insurance service providers are exempt from VAT, and this is normally also the case for healthcare, dental care, social care and schools. VAT returns are filed, and tax is paid monthly, quarterly or yearly depending on turnover.
As a member of the EU, Sweden is also part of the customs union enforcing the Community Customs Code. Most EU customs duties are calculated as a percentage of the value of the goods being imported. All imported goods must be classified according to the EU customs tariff, and the duty rates applied depend on the 'economic sensitivity' of the goods. The actual duty rate to be applied also depends on, inter alia, the country of origin of the product and free trade agreements.
Sweden levies a real estate transfer tax (stamp duty) on most transfers of real estate. Most legal persons pay 4.25 per cent; natural persons and tenant owner associations pay 1.5 per cent tax on a base that consists of the higher of the consideration paid or the tax assessment value of the real estate. Real estate transfer tax on an intra-group transfer of real estate may usually be deferred provided the real estate, the buyer and seller remain in the same group. Real estate transferred through a merger, a demerger or real estate reallotments are currently not subject to real estate transfer tax.
Real estate tax on commercial properties totals approximately 0.2 to 2.8 per cent of the tax assessment value (normally 1 per cent) depending on the type of property. The tax assessment value is supposed to equal 75 per cent of a conservative estimate of the fair market value.
Social security charges payable on remuneration to employees (or by the self-employed) are normally levied at 31.42 per cent. Social security charges are deductible for corporate tax purposes.
Pension benefits beyond the mandatory system are customary in most Swedish employers. A special salary tax is normally levied at a rate of 24.26 per cent on these additional pension premiums and commitments. These taxes are deductible for corporate tax purposes.
Sweden does not impose taxes on gifts, and net wealth and inheritance tax do not exist.
IV TAX RESIDENCE AND FISCAL DOMICILE
i Corporate residence
Swedish limited companies have unlimited tax liability in Sweden unless otherwise stated in special rules.
ii Branch or permanent establishment
A foreign enterprise is liable to pay income tax in Sweden if it is determined that it has a permanent establishment in Sweden. If the enterprise has a permanent establishment in Sweden, it will be taxed for business income (21.4 per cent; expected to be lowered to 20.6 per cent as of 1 January 2021). An 'enterprise' can be a sole trader or a legal person.
A general definition of permanent establishment is found in the Swedish Income Tax Act, which also contains rules regarding when a permanent establishment can be created by a person acting on behalf of an enterprise (e.g., an agent).
A permanent establishment is defined in accordance with the general definition as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Three conditions must be met for the creation of a permanent establishment: (1) a distinct 'place of business'; (2) which must be 'fixed', as in having a certain degree of permanence; and (3) the business of the enterprise must be carried out through that fixed place of business.
The general definition also contains a list of examples of what a permanent establishment may be constituted by: a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, a building site or construction or installation project, or real property that is a current asset in a business operation.
The definition mainly conforms to the permanent establishment definition found in the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and Capital.
If Sweden has an agreement for the avoidance of double taxation (a tax treaty) with the jurisdiction from which an enterprise originates, a permanent establishment must be present both in accordance with the Income Tax Act and the tax treaty for the enterprise to be liable to pay income tax. In accordance with the Income Tax Act, foreign enterprises have a permanent establishment in Sweden if they carry on business wholly or partly from a fixed place of business in Sweden. A business operation is usually considered to be 'fixed' through having a certain degree of permanence when it is carried on for a six-month time period. In most tax treaties that Sweden has entered into with other states, building sites, construction or installation projects are considered to be fixed (have such a degree of permanence) when they are carried on for more than 12 months.
A foreign enterprise may have a permanent establishment in Sweden even when there is no fixed place in Sweden that the business operations are carried on from. This may be the case when the business operations in Sweden are carried on through a dependent agent.
A foreign enterprise is required to submit a tax application to the Tax Agency if it has a permanent establishment in Sweden, is an employer in Sweden or conducts business for which it is liable for Swedish VAT. The Tax Agency may then approve the enterprise as a tax subject conducting business, and decide whether the enterprise must pay, inter alia, preliminary income tax, special salary tax on pension costs, pension yield tax or real estate tax.
A foreign enterprise's business operations in Sweden may be carried on through a branch. The enterprise must register the branch with the Swedish Companies Registration Office.
V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT
i Holding company regimes
There are no rules that apply specifically to holding companies as such, but the participation exemption rules in practice constitute a very favourable holding regime.
There is a capital gains tax exemption for Swedish corporate entities on gains related to the disposal of shares 'held for business purposes'. Shares in Swedish corporations and participations in partnerships, as well as in foreign companies, can qualify as shares held for business purposes, and thus be divested tax-exempt.
Unlisted shares will in principle always be considered as held for business purposes. Listed shares are considered held for business purposes if the company has a holding corresponding to at least 10 per cent of the voting rights or, in certain situations, if the shares are held in the course of the business. An additional condition regarding listed shares, not applicable to unlisted shares, is that the shares must be held for a period of at least one year.
An exception from the capital gains tax exemption applies for the sale of shares in a 'shell company', which is a company or partnership where the fair market value of cash or liquid assets, shares and other marketable instruments (other than shares held for business purposes), and similar assets, exceeds 50 per cent of the consideration paid for the shares. The sale of a shell company results in punitive taxation where the entire consideration, and not just the gain, is taxed. The tax can be completely avoided by filing a shell company tax return within 60 days of signing or closing.
The participation exemption rules also apply to dividends received on shares held for business purposes and on qualifying holdings via partnerships.
ii IP regimes
There are no specific tax advantages in respect of holdings of IP rights, etc., but costs for research and development are deductible provided that the expenses are significant, or can be projected to have, significance for the business. Costs for the acquisition of, inter alia, patents and know-how may, as mentioned above, be deducted in accordance with the rules concerning the depreciation of machinery and equipment.
iii State aid
State aid is not provided in the shape of tax benefits. However, the government takes part in the financing of growth companies by providing venture capital through, inter alia, Industrifonden, Fouriertransform and ALMI Invest.
There are no specific tax incentives in Sweden for corporations. However, some generally applicable favourable regimes exist. For example, Sweden has an accruals reserve regime. The accruals reserve regime allows for a tax-deductible appropriation for corporations of 25 per cent of the taxable profit before appropriation to a reserve. Each year's appropriation forms a separate untaxed reserve that must be reversed to income no later than the sixth year following the appropriation. Standardised interest income is imposed on former years' appropriations at 72 per cent of the interest rate on governmental debt notes.
Furthermore, considering the generous rules regarding tax exemptions for dividends and capital gains on shares, Sweden is a suitable country to establish holding companies (as discussed above).
As of 1 January 2018, new favourable tax rules for employee stock options granted by start-ups were introduced. Several requirements are set out for the rules to apply; for example, the company must in the year of grant have a maximum of 50 employees on an average, revenues of a maximum 80 million kronor and it must have operated its business for less than 10 years. The total value of all stock options granted cannot exceed 75 million kronor and the value of each employee's stock options may not exceed 3 million kronor. Certain types of start-ups, such as banks or financial companies, insurance companies, real estate companies and companies providing tax or auditing services are ineligible to apply the new rules. Employees holding these employee stock options will be subject to capital income tax (effective rate 25 per cent) when the underlying shares are sold instead of salary income tax (progressive rate 29–60 per cent; the highest margin income tax rate will be lowered with 5 per cent as of 1 January 2020) when the stock options are exercised. However, if the company is a closely held company with qualified shares, gains on such shares are taxed at 20–60 per cent (20–55 per cent as of January 2029).
VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS
i Withholding on outward-bound payments (domestic law)
Sweden imposes withholding tax on dividend paid from a Swedish limited company to foreign investors. The tax rate is 30 per cent, but is often reduced or completely omitted.
Sweden does not impose withholding tax on interest payments from a Swedish limited company to a foreign creditor.
A foreign legal entity that receives a royalty from a Swedish company or from a permanent establishment in Sweden may be deemed to have a permanent establishment in Sweden to which the royalty is attributed. However, in some situations this royalty may be exempt from taxation in Sweden.
In 2017, the Swedish government announced that it has commissioned a review of the Withholding Tax Act. The assignment was originally to be reported by 15 December 2018, but given an extension until 31 March 2019. After a delay, the review has now been completed and an internal (non-public) report has been issued. The Ministry of Finance is currently processing the conclusion of the report. Considering the fact that as of the time of writing nothing has been made public, it is highly unlikely that the review will lead to changes that will affect transactions carried out in 2020.
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
A reduced withholding tax rate (or no withholding tax at all) is applied on dividend distributions from a Swedish limited company to a foreign legal entity in accordance with applicable tax treaties. No withholding tax is applied when a foreign legal entity domiciled in the EU holds at least 10 per cent of the shares in the Swedish company paying the dividend, and that company satisfies the conditions in Article 2 of the EU Parent–Subsidiary Directive; and a foreign company that is the equivalent of a Swedish company holds shares in a Swedish company, and the shares are held as a capital asset, provided the shares are not listed or, if the shares are listed, the holding of shares represents at least 10 per cent of the voting interests in the company and the shares have been held for at least one year.
A foreign company deemed to have a permanent establishment in Sweden because it receives royalty payments from Sweden may be exempt from such tax on these payments under rules based on the EU Interest and Royalties Directive.
iii Double tax treaties
Sweden has one of the most extensive tax treaty networks in the world. With a few exceptions, the treaties follow the OECD Model Tax Convention on Income and Capital. Withholding taxes are generally reduced or completely omitted under the treaties.
iv Taxation on receipt
Dividends from foreign companies are generally treated the same way as domestic dividends, and thus are often tax free under the participation exemption rules (see Section V).
Other cross-border income is generally subject to taxation in Sweden. To the extent a Swedish company has paid tax on income in another jurisdiction, such tax is normally deducted from or credited against Swedish tax paid on that income.
VII TAXATION OF FUNDING STRUCTURES
i Thin capitalisation
There are currently no formal thin capitalisation or debt-to-equity rules in Sweden. Compulsory liquidation will, however, be triggered under the Swedish Companies Act if the equity falls below 50 per cent of the registered share capital unless the equity is immediately restored to an amount corresponding to at least the entire registered share capital. Hence, it is often recommended to keep the registered share capital limited compared to the amount of share premium or free equity.
Furthermore, as of 1 January 2019, Sweden has introduced earning stripping rules. The rules are based upon the EU Anti-Tax Avoidance Directive (ATAD), which in turn is based upon base erosion and profit shifting (BEPS) Action 4. The new rules limit interest expense deductions to – much simplified – net interest expenses of up to 30 per cent of earnings before interest, tax, depreciation and amortisation (EBITDA). This limitation only applies – also much simplified – to net interest expense exceeding 5 million kronor (in a group). Equalisation of interest deduction capacity within a group is possible, provided the companies qualify for Swedish tax consolidation. Negative net interest not possible to deduct in one year may be carried forward for up to six years, but is forfeited in the event of a change of control.
ii Deduction of finance costs
Interest accrued on third-party loans is generally tax deductible provided the interest is not related to profits or distribution of profits.
Interest between affiliated parties must be at arm's length to be deductible. Interest paid between affiliated companies that are in excess of an arm's-length interest rate is not tax deductible to the extent it exceeds an arm's-length interest rate. Provided the interest on intercompany loans is properly benchmarked and documented, interest costs are normally deductible.
There are interest deduction limitation rules in Sweden covering intercompany loans between affiliated companies and interest costs on such loans. Expenses related to such a loan will only – much simplified – be tax-deductible if the beneficial owner of the interest is taxed at a level of at least 10 per cent, and the loan was not exclusively, or as good as exclusively (at least 90 per cent), put in place for tax reasons.
The scope of the interest deduction limitation rules covers all loans from affiliated companies regardless of the purpose of the loan. Companies are considered to be affiliated if they could be seen as predominantly jointly managed, or if one of the companies, directly or indirectly, has significant influence over the other company.
A company is defined as a legal entity or as a Swedish partnership. Foreign equivalents also fall under the definition in the Swedish Income Tax Act of a company if the association has the ability to acquire rights and undertake obligations; the ability to institute legal obligations before a court and other authorities; and separate partners cannot freely dispose over the association's assets.
Finally, an interest deduction restriction in the form of anti-hybrid rules was also introduced as of 1 January 2018. The rules target related-party debt in cross-border situations where a company in another state obtains a tax deduction for the same interest expense or when the corresponding interest income is not subject to tax owing to the classification of the income for tax purposes. There is currently a proposal to broaden the scope of the anti-hybrid rules to also cover tax effects of, for example, disregarded entities and permanent establishments, certain hybrid financial instruments and 'double dips' (i.e., costs being deductible in more than one jurisdiction). This is likely to come into force as of 1 January 2020.
iii Restrictions on payments
Dividend distributions (including a reduction of the share capital for repayment or other transfers benefiting the owners) or other transfers not of an entirely commercial nature for the company must be fully covered by the company's restricted equity after the transfer. Furthermore, the transfer must be defensible taking into consideration the requirements imposed by the nature, scope and risks of the business.
iv Return of capital
A distribution to shareholders in connection with a reduction in the share capital without a reduction of the number of shares is taxed as a dividend. A reduction in the share capital in connection with a reduction of the number of shares is, as a general rule, taxed as if the shares have been divested. Exceptions apply to certain closely held companies and with regard to taxation of foreign shareholders insofar as a reduction in the share capital in connection with a reduction of the number of shares is treated as a dividend for tax purposes.
As a main rule, companies are not allowed to acquire their own shares. Certain exceptions apply to listed companies.
VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES
Local Swedish acquisition vehicles are usually established as limited companies. The acquiring company is normally financed through a combination of equity, external loans and shareholder loans. As previously mentioned, Sweden does not have thin capitalisation rules, so generally equity is kept fairly low. Interest deduction limitations rules (including the new earning stripping rules) may, however, limit the tax deduction of interest paid; see Section VII.
The acquisition vehicles and the target company are often merged to get the acquisition financing into the target company. Should this not be done, the financing costs may still be set off against the taxable income in the target company in subsequent years using group contributions with fiscal effects; see Section III.
Swedish tax law provides for a number of tax-neutral restructuring measures.
Under a merger, one or more limited companies transfer all of their assets and liabilities to another company and are subsequently dissolved without liquidation; or two or more limited companies transfer all of their assets and liabilities to a newly formed company and are subsequently dissolved without liquidation. Correctly structured, a merger should in most situations not trigger any adverse tax consequences. Cross-border mergers are possible, but only tax-exempt if the transferred business remains taxable in Sweden (i.e., is allocated to a permanent establishment in Sweden).
Under a share-for-share exchange, a company acquires shares in another company in exchange for payment in the form of shares in itself. Correctly structured, a share-for-share exchange does not trigger any immediate tax consequences. For the seller, the tax base of the sold shares is transferred to the new shares while any cash payment is taxed in its entirety.
A demerger occurs where one limited company transfers all of its assets and liabilities to two or more limited companies and is subsequently dissolved without liquidation. Correctly structured, a demerger should in most situations not trigger any adverse tax consequences.
An intra-group sale below fair market value occurs when a limited company transfers assets at a price below fair market value to another limited company within the group. Correctly structured, an intra-group sale below fair market value does not trigger any adverse tax consequences. Cross-border sales are possible, but only tax-neutral if the transferred assets remain taxable in Sweden (i.e., are allocated to a permanent establishment in Sweden).
A 'Lex Asea dividend' is when a listed limited company transfers all of the shares in a subsidiary to the shareholders through a dividend distribution. Correctly structured, a Lex Asea dividend does not trigger any adverse tax consequences. For the shareholders, the tax base of the shares is apportioned between existing shares and the new shares received.
Exits are usually structured though a tax-exempt sale of Swedish shares; see Section V. Capital gains in an asset sale constitute taxable income.
IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION
i General anti-avoidance
Substance over form
The substance over form concept is somewhat unclear in Swedish tax law. It is sometimes called recharacterisation, relabelling or general assessment. It is not clear if substance over form is to be seen as a label to be used for all of these 'principles'. When applying these 'principles', there is, however, one common denominator: legal actions are recharacterised and taxed accordingly.
It is our interpretation that a substance over form view means that legal actions are analysed from a civil law point of view. Should the true meaning of the legal action be other than the one suggested by the involved parties, the courts may recharacterise the legal actions and, thus, tax them according to their true substance. According to this interpretation, no special substance over form view exists for tax purposes; instead, the civil law substance of actions taken should determine the fiscal effects.
Furthermore, when the concept of substance over form is examined, discussions sometimes tend to focus on chains of transactions that are pre-planned, preordained, or both, where some of the transactions have no real meaning or seem pointless unless all of the transactions are viewed as a whole. The fact that a chain of events is pre-planned is generally not enough to recharacterise the events using a substance over form view as long as each transaction entitles the parties' true rights (or duties) for a certain period of time.
Tax Avoidance Act
According to the Tax Avoidance Act, legal action should not be considered if:
- the legal action, alone or together with other legal actions, is a part of a procedure resulting in a substantial tax benefit for the tax subject;
- the tax subject has directly or indirectly taken part in the legal action or actions;
- the tax benefit, considering the circumstances, can be assumed to be the main reason for the procedure; and
- taxation on the basis of the procedure would be in conflict with the purpose of the law, as clear from the tax rules' general design and from the rules directly applicable or circumvented by the procedure.
The Tax Avoidance Act is only applicable if all of the above prerequisites are fulfilled. If fulfilled, taxation should be made as if the legal actions had not been undertaken. If the procedure, considering the economic outcome, appears to be a detour in comparison to the procedure closest at hand, then the tax subject will be taxed as if the tax subject had chosen that procedure instead.
The rules in the Tax Avoidance Act, its preparatory works and the relevant case law are considered exceedingly difficult to interpret and very vague, foremost because it has to be determined whether something that cannot yet be derived from the applicable laws shall be considered to be encompassed by the purpose of the law under the general design of the law. In the preparatory works of the Tax Avoidance Act, it is emphasised that it is first and foremost the general design of the laws, and not their preparatory works, that shall be used when interpreting the law.
ii Controlled foreign corporations (CFCs)
A Swedish taxpayer directly or indirectly controlling at least 25 per cent of a foreign legal entity's equity or voting interest may be taxed for the foreign company's taxable result if the foreign legal entity is low-taxed (CFC taxation).
Income is considered to be low-taxed if the net income, calculated on the basis of the rules that would apply to taxation if the entity was Swedish, is subject to less than approximately 11.8 per cent tax. The net income is not deemed to be low-taxed if the foreign legal entity is domiciled and subject to taxation in a country identified on a 'white list'. Furthermore, CFC taxation within the European Economic Area (EEA) is limited to financing and insurance of risks encountered by associated companies.
A legal entity domiciled in a state within the EEA that conducts commercially motivated activities from an actual establishment is excluded from CFC taxation.
As of January 2020, the CFC rules will be further tightened. Several jurisdictions will be deleted from the 'white list', and further exceptions from the remaining 'white list' will be introduced for insurance and financial business in certain jurisdictions, for example.
iii Transfer pricing
Cross-border transactions between companies that are associated must be carried out on an arm's-length basis. Otherwise, the Swedish company will be taxed as if the transactions had been carried out on market terms.
The Swedish transfer pricing rules are, essentially, worded in accordance with the corresponding provisions in the OECD framework.
As of 2007, Sweden implemented transfer pricing documentation rules. Hence, the pricing mechanism of all cross-border transactions between related parties must be appropriately documented. In October 2016, the government submitted a proposal to extend these rules by incorporating country-by-country reports based on the OECD BEPS project and EU Directive 2011/16/EU (DAC 4). The new rules came into force in 2017 and are applicable to companies that are part of a multinational group with a turnover exceeding 7 billion kronor.
iv Tax clearances and rulings
See Section III.
X YEAR IN REVIEW
During 2019, the total tax pressure has been slightly reduced from 44.4 to 43.8 per cent of gross national product. The most significant change in 2019 was the introduction of earning stripping rules (and other adaptations to ATAD) and the reduction of the corporate income tax from 22 to 21.4 per cent. There was also a minor reduction on tax on pensions.
XI OUTLOOK AND CONCLUSIONS
Going forward, the most notable change in 2020 will arguably be that the highest margin tax rate for tax on salary income and capital income from closely held companies will be lowered from 60 to 55 per cent as of 1 January 2020. Other changes that will, or are expected, to come into force in 2020 are stricter hybrid rules and stricter CFC rules: DAC 6 will also need to be implemented. Corporate income tax is expected to be lowered from 21.4 to 20.6 per cent as of 1 January 2021.
It is also likely that the government investigation into withholding tax will eventually lead to certain changes, but it is too early to speculate when and how.
Finally, on 31 August 2019, finance minister Magdalena Andersson held a press conference in which she stated that the government intends to introduce a new 'bank tax' in 2022. There is currently no information available on how such a tax will be shaped.