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Swedish Holding Companies – a big surprise!

Introduction

Sweden has a wide spread reputation for being a high tax country.
This reputation gives a fairly true picture for individuals but not for
companies.

The tax rate for companies is 28 % in Sweden, which is rather low in
an international comparison. There are also ways of keeping funds
untaxed within a company for long periods of time which are uncommon
internationally. It is true that as soon as profits leave a company as
salaries to employees or dividends to shareholders who are residents of
Sweden, the taxes incurred will confirm the country’s reputation. This
is in line with the policy of the Swedish social democratic party,
which has been in government since decades but for a few years. It
wants to encourage Swedish owners of companies to let profits
accumulate in their companies. Thus, as long as profits stay in the
company or if the dividends are distributed to individuals or companies
which are resident outside of Sweden, the tax impact will often be very
interesting and surprise international tax planners.

For some time I have been thinking of writing an article about Swedish
Holding Companies. During 1983 to 1996 I was AB Volvo’s Controller of Taxes.
Now and then I had to study holding companies in various countries as
vehicles to channel funds. What I see now as a Swedish tax advisor is that
Swedish Holding Companies of today have turned out to be far better tools than I
could have dreamed of during my time at Volvo.

From the 1 of July 2003 new rules have been adopted regarding
dividends and capital gains on shares in a Swedish Holding Company.
Usually such capital gains and dividends are tax free nowadays. Add to
this that Sweden is inside the EU, has an extensive net work of double
tax treaties, no thin capitalisation rules and no withholding taxes on
interest. Putting these pieces of favourable tax treatment together
with other Swedish rules or lack of rules Sweden emerges as one of the
world’s most interesting locations for holding companies.

The important characteristics

I believe that in the future Swedish Holding Companies will become
an important tool for international groups of companies to decrease
their consolidated tax expense. Below you will find a list of the
principle characteristics of Swedish Holding Companies today:

  1. Dividends from unquoted companies are tax free
  2. No capital gains on sales of shares in unquoted companies
  3. No withholding tax on interest
  4. No thin capitalisation rules
  5. Interest expenses are always deductible
  6. Seldom withholding tax on dividends
  7. No capital tax on the creation of a company nor increases of share capital
  8. Credit of tax rules are very favourable even without applying double tax treaties
  9. Swedish corporate income tax is 28 %. Taking favourable
    possibilities of postponing tax payments into consideration the
    effective tax rate is often around 25 % or lower
  10. Sweden is a member of the EU
  11. Accounting in Euros is possible
  12. Sweden has double tax treaties with around 80 countries and territories and the number is increasing
  13. Advisors’ fees are low in Sweden

Comments to the characteristic features
Below I make some comments to the features listed above. The comments
are of course not complete in ever aspect but I hope to satisfy the
first curiosity of the reader.

1. Dividends from unquoted companies are tax free

On the 1st of July 2003 Sweden introduced new rules regarding
“näringsbetingade aktier”. This term could be translated as “business
related shares”. A holding company’s shares in other companies are
regarded as “business related” if one of the following criteria is met:

  • The shares are not listed on any stock exchange or similar market place, (unquoted shares),
  • The shares represent 10 % or more of the voting power in the company
  • The business of the holding company or its subsidiaries is related to the business of the company held.

This means that the shares held by a holding company would usually be regarded as “business related”.
Dividends from unquoted shares and other “business related shares” are
tax free for the holding company with only a few exceptions.
There are exceptions for dividends from controlled foreign companies in
certain tax haven countries (CFC-rules). Profits in such companies
shall according to the Swedish tax law be taxed in Sweden immediately
as they arise no matter whether these profits are distributed as
dividends or not. Therefore, a Swedish Holding Company would normally
be imposed with the ordinary corporate tax of 28 % on profits in a tax
haven subsidiary.

2. No capital gains on sales of shares in unquoted companies

From the 1st of July 2003 capital gains on sales of “business related
shares” (see previous section) will be tax free for the holding
company. This rule creates excellent flexibility for future internal
restructuring of the business and for sales of companies or business
segments.
There are a few exceptions worth mentioning. If a “business related
share” is quoted (e.g. 10 % or more of voting power) it must have been
held for year or more. Another exception regards sales of shares in
“shell companies”, i.e. companies containing lots of cash or other
liquid funds but few other assets. Such companies have often been used
for tax evasion purposes in Sweden. A company may be deemed to be a
shell company under certain circumstances. With some planning the
problems with “shell companies” can be avoided – usually without great
difficulties.


3. No withholding tax on interest

Sweden has never had any withholding tax on interest. According to some
double tax treaties Sweden has the right to withhold tax on interest
but it has never used this right. It does not matter if the lender, for
example, is domiciled in at tax haven or if the lender is also a
shareholder. Therefore a tax haven investor would preferably put in a
low share capital in the Swedish Holding Company and instead give the
company a loan.


4. No thin capitalisation rules

Sweden has no thin capitalisation rules. This means that a shareholder
domiciled outside of Sweden may chose to record a low share capital in
the Swedish Holding Company and lend money to the company instead. Of
course the Swedish tax authorities might wish to challenge such a
structure and reclassify loans as equity and deductible interest as
non-deductible dividends. Such a reclassification could also in rare
cases result in withholding tax as for dividends. Since the tax law
does not contain any thin capitalisation rules it is, however, very
unlikely that the Swedish tax authorities would try to make
reclassifications unless the tax planning has been extremely aggressive.


5. Interest expenses are always deductible

Interest expenses are deductible for the Swedish Holding Company even
if the corresponding loans have been used to buy shares which produce
tax free dividends. In such a situation the holding company could use
the deductible interest to offset taxable income from other activities
in Sweden or from CFC-companies (see above). It could also accumulate
loss carry forwards for future Swedish tax purposes. There is no time
limit for the use of loss carry forwards.


6. Seldom withholding tax on dividends

According to the Swedish internal tax law the withholding tax on
dividends is 30 % if the recipient is domiciled abroad. There are,
however, some exceptions which may apply if the recipient is a company.
Furthermore, in most of Sweden’s about 80 double tax treaties the rate
has been reduced – often to zero. Sweden has not concluded any tax
treaties with tax haven countries. Therefore tax haven investors might
be inclined to give loans to the Swedish Holding Company in order to
receive interest.


7. No capital tax on the creation of a company nor increases of share capital

In many jurisdictions there is a capital or stamp tax on the creation
of a company and increases of share capital. In the Netherlands, for
example, the capital tax seems to be 0, 55 % at present.


8. Credit of tax rules are very favourable even without applying double tax treaties

If the same income would be taxed both in Sweden and in another
country, Sweden may remedy this problem by its favourable system for
the avoidance of double taxation by tax credits. Usually tax paid in
the other country may be credited against the Swedish tax without
problems. Also the double tax treaties contain reasonable methods of
avoiding double taxation. Typically, the treaties will reduce
withholding taxes on dividends and interest from subsidiaries to a
Swedish Holding Company.


9. Swedish corporate income tax is 28 %. Taking favourable
possibilities of postponing tax payments into consideration the
effective tax rate is often around 25 % or lower

All income in a Swedish company is taxed with a flat rate of 28 %. Loss
carry forwards are possible without any time limit. Carry backs are not
possible. It is, however, possible to postpone the payment of taxes by
using “periodiseringsfonder”. The word is hard to translate but “tax
allocation reserve” might be appropriate. Under certain conditions a
company may withdraw 25 % of taxable income every year by recording a
“tax allocation reserve” in the books. Such a reserve must be dissolved
in the sixth year after it was first recorded at the latest. A
dissolved reserve will increase taxable income (or decrease a loss).
Furthermore, taxes may be postponed by taking advantage of the
favourable rules for depreciation of machinery and equipment (20 %
straight line or 30 % declining balance depreciation). Even big and
long-life machinery such as ships may be depreciated over five years.


10. Sweden is a member of the EU

As a member of the EU Sweden is part of intra union system of free
flows of labour, services and capital. Therefore, it can be expected
that a Swedish Holding Company will have excellent possibilities in
making intra European transactions. For example, as a consequence of
the parent/subsidiary directive there should be no withholding taxes on
dividends from EU subsidiaries to a Swedish Holding Company.


11. Accounting in Euros is possible

Since a couple of years a Swedish company may chose between making up
its accounts in Swedish Crowns or in Euros. If the international
investor would hesitate to expose himself to fluctuations in the
Swedish Crown, there is an option for him to let the Swedish Holding
Company do its accounting - including official annual reports - in
Euros.


12. Sweden has double tax treaties with around 80 countries and territories and the number is increasing

Since decades Sweden has been very active in concluding double tax
treaties. For holding company with global activities it is essential to
have the possibility to refer to tax treaties. This is indeed possible
in Sweden.


13. Advisors’ fees are low in Sweden

Generally speaking advisors’ fees are low in Sweden. Within Sweden
Gothenburg prices are lower than Stockholm. I estimate that prices per
hour normally will fall within the following ranges: Tax advisors and
lawyers £ 100-250; auditors £ 75-200; bookkeepers £ 25-50. Swedish
advisors usually have an excellent command of the English language.
Relations to tax authorities outside of Sweden
What is unique with the characteristics of Swedish Holding Companies is
that Sweden has them without being regarded as a tax haven or even a
low tax country. For this reason it can be expected that a Swedish
Holding Company will have less problems in relation to tax authorities
outside of Sweden than a holding company located in a real low tax
country.

Clas Ramert
C Ramert AB