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At a recent tax seminar arranged by the Swedish branch of the International Fiscal Association (and hosted by Delphi Advokatbyrå) in Stockholm invited representatives of the international tax department of the Swedish Treasury provided information on Sweden’s tax treaty network and current matters relating thereto.
 
With  regard to the Sweden-Austria treaty,  which - it was noted - is frequently (ab)used for eliminating capital gains taxation on the sale of shares (the technique for which shall be explained below) it was reported that a draft for a new treaty was initialled (parafé) on 2 March 1995 and that “an exchange of letters was in progress”. This correspondence between the two countries has thus been going on now for 11 (eleven) years!
 
The present Sweden-Austria treaty was signed 14 May 1959. Amendments and additions  were made in 1970 and 1991.  During the negotiations that led up to the 1991 protocol, (which was concluded in order to prevent certain non taxed Austrian holding company dividends to be passed on without taxation to Swedish parent companies), it was admitted, which is now almost 16 (sixteen) years ago, that the treaty was “extremely outdated” and that a comprehensive revision thereof  ought to take place “as soon as possible”. 
 
In 1983 Sweden tightened its domestic capital gains tax regime by imposing tax on the sales of Swedish securities occurring during a ten year period upon the emigration from Sweden of resident individuals. This legislation, however, had little effect on individuals moving to treaty countries as such treaties normally assign primary and sole taxing rights on capital gains to the residence state. Therefore, and which has been completed to a very large extent, Sweden has renegotiated its treaty network in order to preserve its domestic tax claims on capital gains. (In certain treaties the ten year tax ‘quarantine’ period has been reduced. In others, nationals of the other state have been exempted from the tax.).
 
The Sweden-Austria treaty, however, is still of the ‘jolly old’ model allowing only Austria to tax its residents on capital gains. Adding strongly to the attraction hereof is that Austria, under its domestic capital gains tax regime, only imposes tax on such appreciation of the shares that occurs from the point in time of immigration of the seller. The acquisition price of the shares is consequently ‘stepped-up’ to the value thereof at the time the seller moves in to Austria. A sale that occurs shortly thereupon is then virtually tax free.
 
Not surprisingly, Austria for a long time has been a favourite country for  emigrating Swedish shareholders and the tax base losses in Sweden resulting from this kind of tax planning are now running into the billions.
 
At the seminar our treaty negotiators laconically mentioned that new rounds of treaty negotiations were under way to update the 1995 draft. No time frame, however, was given for the completion of a  new treaty.  Ticktack, ticktack .…..….
 
peter@sundgren.net