New capital gains tax rules on shares sold by emigrating Swedish residents
New capital gains tax rules on shares sold by emigrating Swedish residents.
Under the Swedish so called 10-year rule which has been in force ever since 1983 Swedish individual tax residents (of all nationalities) who move abroad and who sell Swedish shares (and other specified securities) within a ten year period remain subject to capital gains taxation in Sweden (at 30% of the gain). In a recent report (Vissa kapitalbeskattningsfrågor) the Swedish finance department has suggested that this tax liability shall be extended to cover also to the sale of foreign shares (that were acquired during the investors residence in Sweden.)
Additionally, and in compliance with a ruling by the European Court of Justice (ECJ) , it is suggested that Sweden’s present legislation imposing tax on non-arm’s length internal share transfers (underprisöverlåtelser) to foreign companies shall not apply within the EES area. (Considering the overriding effect of ECJ rulings such a change of our rules is just an adaptation to EC law and thus of only cosmetic character.)
In an article in LINK Magazine published by the Swedish Chamber of Commerce in London Ms Malin Andersson of Price Waterhouse in London and Mr Staffan Andersson of ÖhrlingsPricewaterhouseCoopers in Stockholm have presented the new rules with special reference to their consequences for Swedes that move to the UK. The article and in particular the examples therein provide an interesting basis for an expanded discussion of the new proposals especially in their interaction with the Sweden-UK tax treaty and the UK subject-to-remittance rules. This is what Ms and Mr Andersson wrote:
- You moved from Sweden to the UK during 1999 and had before the move acquired shares in the now Swiss company ABB for SEK 200,000. The shares have today a value of SEK 500,000. You have no close connection to Sweden and is accordingly only liable to taxation on a limited basis (Sw: begränsat skattskyldig) in Sweden.
If you sell the shares now and do not remit the sales proceeds to the UK, there will be no tax, neither in Sweden nor the UK.
If you instead sell the shares during 2008, when the new rules apply, Sweden will have the right to levy a tax on the gain with 30% of SEK 300,000 = SEK 90,000 (assuming that you do not remit the gain to the UK).
- When you moved to the UK in 2004, you established a holding company in Luxembourg which acquired your Swedish company for tax book value, SEK 100,000. The Luxembourg company has now sold the Swedish subsidiary at a gain of SEK 10 ,000,000 and you have no longer a close connection to Sweden.
If you liquidate the Luxembourg Company 2008 or later, when the new rules apply, the capital gain of SEK 10,000,000 will be subject to Swedish capital gains taxation.
The new tax rules proposed in Sweden linked with the rules in the tax treaty, makes it important to carefully consider your private tax position and take assistance from an experienced tax advisor, who understands both the UK and the Swedish tax rules, in more complicated situations.
Malin Andersson, email@example.com, telephone: +44 207 804 1801
(1) Items of income of a resident of a Contracting State, wherever arising, other than income paid out of trusts, which are not expressly mentioned in the foregoing Articles of this Convention shall be taxable only in that State.
Example 1 in Ms and Mr Andersson’s article:
If the sale of the Swiss (and thus foreign) ABB shares takes place in 2007, before the entry into force of the new Swedish legislation, there will of course be no Swedish tax liability. (Note also that the seven year tax period for the shareholder who moved to the UK in 1999 elapsed not later than 31 December 2006 which also precludes all Swedish tax claims under article 13.2.) If the sale is made outside the UK (more hereon below) and the gain is not remitted to the UK it will also escape UK tax.
If instead the shares are sold in 2008, when the new Swedish rules are expected to apply, Sweden, under these domestic provisions, will of course have the right to tax the gain. However, and this is a restriction which applies to quite a number of our tax treaties, the Sweden-UK tax treaty, article 13 subparagraph 2 (first sentence), gives Sweden primary taxing rights to share gains only with respect to shares in companies resident in Sweden. (In this case too the 7 year period precludes any application of article 13 subparagraph 2.)
The gain on the sale of the shares in ABB is thus to be taxed not according to this subparagraph of the treaty but instead according to article 13 subparagraph 7 of the treaty, which gives the UK, the state of residence of the shareholder, sole taxing rights. This UK tax, however, under UK domestic laws is triggered only if the gain is remitted to the UK. However, as assumed under the example, if the gain is not remitted to the UK, then Sweden may tax under article 27.
The taxation that may take place in Sweden as of 2008 in this case is thus activated not by virtue of article 13 subparagraph 2 but to a combination of the entry into force of the proposed Swedish rule and the fact that the gain is not remitted. But if remittance takes place the UK will have sole taxing rights.
Example 2 in Ms and Mr Andersson’s article:
This innocent-looking example represents a tax planning ploy which has given rise to massive – I repeat massive -capital gains tax base losses in Sweden ever since the introduction of our general tax reform in 1991. The underlying reason for the transfer of the shares of the Swedish company to the Luxembourg (and EU) holding company at a non-arm’s length tax book value (and acquisition price) of 100 000 SEK, (a transfer which has no other business purpose whatsoever but to avoid Swedish tax), is to establish a structure allowing a subsequent sale of the foreign holding company (together with its new Swedish subsidiary). The Swedish legislator has been working feverishly to plug this loop-hole ever since the late 90s but been constantly frustrated by new tax planning techniques and now also, as mentioned above, by intervention of the ECJ.
As also mentioned above a disposal of a foreign company, in this case the Luxembourg holding company, is not caught by the present Swedish 10-year rule. By extending this rule also to foreign shares as suggested in the new finance department report this strategy is intended to be thwarted. But again, the Sweden-UK tax treaty prevents Sweden from taxing other gains than those derived from sales of Swedish companies. B is consequently not liable to tax in Sweden on the sale of his Luxembourg company. If, however, the gain is not remitted, Sweden may invoke article 27.
Ms and Mr Andersson’s example, however, considers not a sale of the Luxembourg company but a liquidation thereof and, it must be assumed a subsequent distribution of its assets. Such a distribution, under Swedish tax law, is also treated as a capital gain and would thus allow Sweden to tax in a no-treaty situation. It is uncertain, however, if a distribution of this kind is covered by the capital gains tax article in the UK treaty as the text of article 13 subparagraph 2 addresses only capital gains derived from an “ alienation of shares” by (in this case) a UK resident tax payer. If so, alternatively, it is suggested that article 21 of the treaty, which deals with “other income” (not mentioned in the foregoing articles of the treaty), shall apply to a distribution of the assets of the liquidated (Luxembourg) company. But in either case and again under both of these articles, considering that proceeds are derived from a liquidation of a foreign (Luxembourg) company, the sole right of taxation is conferred upon the state of residence of the shareholder i.e. the UK.
Therefore, respectfully, I disagree with Ms and Mr Andersson’s conclusion that, in their example 2, Sweden is allowed to tax the receipts of the liquidation proceeds.
(Again, of course, if the UK, due to non-remittance, cannot avail itself of its taxing rights under the treaty, Sweden can invoke article 27.)
Another alternative to consider in order to collect the proceeds of the investments in the Swedish and Luxembourg companies free of Swedish tax could be for this latter company to sell its Swedish subsidiary and then to distribute the gain as a dividend to its UK owner. Such a distribution, which is pointed out by Ms and Mr Andersson, is not covered by the Swedish 10 year rule which applies only to capital gains. Instead, however, a dividend payment from the Luxembourg company will give rise to withholding tax consequences in Luxembourg. (And the Luxembourg-UK treaty also contains non-remittance rules.)
A further (deferred) second level tax sheltering alternative upon a sale of the Swedish company by the Luxembourg company is to loan the cash to its UK shareholder. See further below.
More on subject-to-remittance issues.
To a non-UK tax practitioner like myself the rules and especially the practical application of subject-to-tax provisions in the UK and elsewhere are to a certain extent shrouded in obscurity. (Therefore, if some of the following observations are wrong I shall gladly stand corrected.)
One problem which occurs in this context is what is meant in the Sweden-UK treaty by a remittance of a capital gain. In a double taxation situation it is not possible to determine the gain before a remittance has taken place thus establishing which of the contracting states has the primary right to tax. The remittance must therefore, it is suggested, refer to the remittance of the amount of the proceeds from the sale of the shares. This will then determine the amount of the acquisition cost to be allocated to the tax assessment in the respective countries. If thus e.g. the proceeds from the sale amount to 10 000 000 SEK and the acquisition cost of the shares is 100 000 SEK and the seller remits 6 000 000 SEK or 60% of the proceeds to the UK, the determination of the gain in the UK should be based on the difference between this latter sum and 60 000 SEK or 60% of the acquisition cost. Sweden would then be entitled to tax the remaining non-remitted 4 000 000 SEK of the proceeds minus 40 000 SEK of the acquisition cost.
A further problem is what happens if the UK resident shareholder sells his shares to another UK resident person. Are the proceeds then automatically to be considered remitted to or received in the UK by the seller or can they, if paid to the seller’s foreign bank account remain un-remitted? Or in other words, is remittance determined by where the buyer is resident or to which country the proceeds of the sale are paid in?
Also problematic regarding remittance basis rules is how they should be applied by withholding agents and tax authorities in the source state. In Sweden there are no special regulations hereon nor have the competent authorities of tax treaties issued any rules or advice in these matters. There are general domestic rules in Sweden under which all tax payers invoking treaty benefits must automatically furnish appropriate information. This would mean that UK resident Swedish citizens must continually report all non-remitted Swedish source income to which the UK has primary taxing rights under the treaty with Sweden and which is taxable under Swedish tax law so that proper Swedish taxes can be collected. As far as Swedish withholding tax agents are concerned tax on for instance dividends and pension payments from Swedish companies and insurance companies to the UK should thus collect full Swedish source tax unless payment is made to UK bank accounts. It appears, however, that in practise nobody pays much attention to these obligations. Nor has it ever occurred that the Swedish tax authorities have prosecuted UK resident Swedes for non-reporting of non-remitted Swedish incomes or gains.
A further problem is to establish at what point in time remittance must have occurred in order to determine which country may tax the income/gain. A reasonable solution would be to grant the taxpayer a respite until the date of filing his tax return in the source state. Also unclear is how to treat a subsequent remittance. Does England then impose tax giving a credit for the source tax or is this tax final?
Dagens Industri, Sweden’s leading daily financial newspaper, (14 July, 2007) - concluding that non-domiciled foreigners are paying less UK tax than the people cleaning their toilets – has reported that discontent in England is mounting over the unfairness of the remittance basis regime which is a remnant of the colonial era and non-convertible currencies with no relevance in our present globalised and digitalised capital markets. Also, UK regulators have (finally?) understood that the amount of foreign source non-remitted income is very considerable and - supported even by UK business circles - are considering abolishing or changing remittance basis rules.
In view of the fact, as mentioned above, that the source states have great difficulties implementing the subject to remittance clauses of their tax treaties it can be taken for granted that in practise these incomes and gains elude taxation altogether. And that of course is precisely why remittance basis taxation is so appealing to foreigners moving to the UK!
As can be concluded from the above discussion the new Swedish legislation suggested by the finance department to a large extent is just a “paper tiger”. A number of our tax treaties prevent the application of our ten year rule as far as foreign shares are concerned and other imaginative tax planning strategies can also be adopted to circumvent the new rules. And the remittance basis taxation in the UK continues to provide a vast array of tax avoidance opportunities (most of which, however, should probably be labelled as tax evasion.)
As mentioned above the tactics employed to “expatriate” share gains of Swedish entrepreneurs moving abroad have given rise to enormous Swedish tax base losses. The (National) Tax Authority (Skatteverket) in their response to the finance department report has established that only in the last two years SEK 450 million worth of Swedish company equity has been subject to international internal share transactions most of which, it is further alleged, has also gone untaxed abroad. A further purpose of the use of a foreign holding company construction as described above, says the Tax Authority, is to avoid the Swedish restrictions regarding shareholder loans (låneförbudet) which applies only to Swedish companies. Considering therefore the impotence of the new rules The Tax Authority has stressed the need to impose as soon as possible new capital gains tax exit rules (combined with deferred taxation) on Swedish emigrants that comply with EC regulations and that something should be done also about the just mentioned shareholder loans. The finance department, however, seemingly unconcerned (or ignorant) about the urgency in these matters is still dragging its feet and have taken no initiatives in this regard. And it has now been five years since the ECJ ruling on the “X and Y case”! Our tax treaty negotiation office seems also to have closed down and gone home.
Stockholm in October 2007
The above article (in a Swedish version) has been published in Svensk Skattetidning 6-7/2007 accompanied also by a reply by Staffan Andersson agreeing that, under example 2, the proceeds from the liquidation of the Luxembourg company would be subject to tax in Sweden if they were not remitted to the UK. If remitted the UK will tax the gain at a rate of 40%. Therefore, he concluded, the shareholder would usually be faced with the alternative of either paying this 40% tax upon remittance or nil if not remitted.
He also added that Swedes resident in the UK are well acquainted with the function of the remittance rules and the advantages that can be drawn there from. Nevertheless, due to the extreme complexities of the remittance regime, he recommends that tax payers take expert advice in these matters.
Personally I am not surprised to hear about the widespread knowledge in the Swedish community in the UK on the advantages of the remittance regime. Considering, however, the very small amount of Swedish tax that is collected in practise on un-remitted gains and other types of income it seems that the Swedish tax reporting requirements in this regard are less well-known.
Also, Staffan, if tax is properly paid in Sweden on un-remitted gains the above noted tax advantage is not the difference between the 40% UK tax and nil but between 40% and the Swedish 30% tax! The 40% ‘tax sparing’ that can be enjoyed upon non-remittance will occur only if the gain is not duly reported to the Swedish tax authorities.