TAXES AROUND THE WORLD Swedish holding company regime – A tax haven?

exemption), as introduced in company is subject to income tax at a 2003, is intended to provide tax rate lower than 14.465% on its an overview of the most sig- profit calculated according to Swedish nificant aspects of the legis- tax law. lation and is accordingly not As regards shares in foreign com- intended as a complete de- panies situated within the EU, the scription of the legislation. requirements related to holdings in listed/quoted companies and to shares Business related shares and as capital assets do not need to be ful- capital investment shares filled, provided that the holding corre- By way of introduction, it sponds to at least 10% of the equity and should be noted that only that the company is listed in the appen- shares classified as capital as- dix to the parent-subsidiary directive. sets, i.e. fixed financial as- If a share does not qualify as busi- sets, may be qualified as busi- ness related, the share will, for the pur- ness related shares for tax poses of this article, be referred to as a purposes. capital investment share. A non-quoted share shall always be regarded as a busi- Dividends and capital gains/losses ness related share. No re- A Swedish limited liability company is quirements related to the exempt from income tax both on divi- holding time or minimum dends and capital gains on business re- percentages apply. lated shares. Losses on such shares are, A quoted share shall be re- correspondingly, not tax deductible. garded as a business related Should a share in a foreign legal entity share, if the legal entity own- be considered as business related, the By Mahmut Baran ing the share possesses at least 10% of same rules apply. Partner, Bird & Bird, Stockholm the votes in the entity or if the share- Dividends and capital gains on capi- holding in question is motivated by the tal investment shares are not subject to Sweden has a reputation for being a business operations of the legal entity the participation exemption rules. Ac- high-tax country. Nevertheless, Swed- owning the share or of any affiliated cordingly, losses on such shares are tax- ish tax law has created one of Europe’s company of such entity. However, if a deductible against profits on the shares most favorable tax environments for quoted share is sold before being and other securities similar to shares. holding companies. Even though the owned at least 1 year, it will cease to be The acquisition cost for tax pur- corporate tax is 26.3%, Sweden offers regarded as business related within poses, if a business related share is very attractive rules in relation to in- such period and, subsequently, the cap- transformed into a capital investment come from holdings of “business re- ital gain on such disposal will be sub- share, will be valuated at the market lated shares”, i.e. shares deemed to be ject to income tax. value at the time of the transformation held for business purposes. Sweden The definition of business related in order to avoid a deduction of the can, with its legislation, offer the fol- shares also includes shares in foreign value decrease. Consequently, an in- lowing: legal entities, provided that the foreign crease during the period before the re- entity is a taxable entity in its home classification will not be subject to in- . no income tax on dividends received jurisdiction and deemed as similar to a come tax. If the capital investment from business related shares Swedish limited liability company share is transformed into a business re- . no income tax on capital gains from from a civil law perspective. Please lated share, the transformation in itself sales of business related shares note that a Swedish company that holds will not trigger any tax consequences. . no withholding tax on dividends on an interest in a controlled foreign com- In this context, it should be men- shares in Swedish legal entities (see pany (“CFC”) may, under certain con- tioned again that profits in controlled prerequisites below) ditions, be subject to Swedish income foreign companies are taxed different- tax on the foreign company’s income ly by being taxed in Sweden immedi- The following presentation on the on an accrued basis. In summary, a ately as the income arise, i.e. at accrued corporate tax exemption (participation CFC-company will be at hand if the basis. However, the shares in CFCs are

28 5/2009 PRIVATE TAXES AROUND THE WORLD not excluded from the participation ex- emption rules if the requirements, with regard to business related shares, are The Swiss perspective fulfilled. In the last months and years the Swiss tax policy was mainly dom- Partnership1) inated by foreign pressure from the According to government draft legisla- EU and the G-20. As a result of the tion, the rules of participation exemp- pressure the Swiss government tion are suggested to include also inter- had to react quickly and effective- ests in Swedish partnerships or foreign ly with re-negotiations of various partnerships within the EEA as well as double tax conventions. However, shares in limited liability companies the – probably main – reason why held by such partnerships as from Switzerland came under pressure 1 January 2010. An interest in a part- was the total absence of a basic nership shall, thus, be treated as a strategy in international tax mat- business related share if the owner is ters. Since a couple of years, capable of holding business related Switzerland applies a case-by-case shares. Furthermore, partnerships can strategy and resembles an unguid- divest their possession of shares in ed ship in the infinite vastness of limited liability companies without the an ocean. It’s high time to take partners being subject to taxation, if over the helm and to replace the the capital gain would have been tax- failed case-by-case strategy by a exempt if the partner itself had divest- consistent strategy based on long- ed the shares. Dividends on shares held term considerations. by the partnership are tax-free for the The article of our Swedish colleague exemplifies the way how even a country with partner provided that the dividend a reputation as a high tax jurisdiction introduces step by step a new and favorable would have been tax-exempt if per- tax regime, which is fully compliant with the EU rules. The introduction of the ceived directly by the partner. new rules is based on a long-term, well-considered strategy, which contains cre- ative approaches, such as, e.g., the planned application of the new participation Withholding tax on dividends exemption rules for partnerships. In combination with the general lack of thin on shares in Swedish companies capitalization rules (however, with some exceptions) the new regime will offer The Swedish participation exemption attractive opportunities for holding structures – and each new Swedish holding is also applicable to benefits in foreign structure will be missing in Switzerland... companies holding shares in Swedish Christian Lyk, Partner, Kendris private Ltd. liability companies. Since non-residents www.kendris.com. of Sweden are not, as a main rule, sub- ject to capital gains taxation, the benefits ticipation exemption. Interest on loans rate of 26.3%, a fairly low rate in inter- provided under the participation ex- is thus deductible, regardless of the national comparison. There are no ad- emption are limited to withholding tax. capitalization of a Swedish company. ditional local taxes. A foreign legal entity is entitled to However, it should be mentioned that The reputation for being a high-tax receive withholding-tax-free dividends, new rules have entered into force, lim- country may be true for individuals, provided that it is taxed in its home ju- iting, under certain circumstances, the but not for companies. The review risdiction in a similar way as a Swedish deductibility of interest expenses on above reveals Sweden as more attrac- limited liability company and provided loans to the extent that it refers to an ac- tive than many other countries within that the shares in the distributing com- quisition of shares from an affiliated the EU. In fact, Sweden has become pany would have been considered as company. one of the most attractive jurisdictions business related shares if held by a for holding purposes, especially due to Swedish limited liability company. Certain other benefits the wide definition of business related and improvements shares implying that even small hold- No withholding tax on interest A Swedish holding company can be ings may benefit from the participation and no thin capitalization rules established without any stamp duty or exemption regime. Sweden does not impose withholding incorporation tax. Furthermore, the ad- tax on interest paid to non-tax residents ministration related to the establish- of Sweden. ment of a Swedish company is to be Sweden has no thin capitalization seen as rather uncomplicated in an in- 1) Partnership is not a taxable person. Instead the rules and no restriction applies with re- ternational comparison. partner is taxed for his or her part of the profit of gard to deduction of interest on loans Corporate income tax has, in addi- the partnership. for shareholding qualifying for the par- tion, been reduced from 28% to a flat www.twobirds.com.

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