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Swedish limited liability companies as holding companies in international corporate structures

The Swedish taxation regime has undergone a radical overhaul in the last few years. Jens Baastrup of Hamilton & Co provides an overview of the implications these changes have made.

Over the past several years Sweden has prepared new and from an international perspective very competitive rules, which make Swedish limited liability companies (Sw. Aktiebolag) very attractive as holding companies in international corporate structures.

As a first step and with effect from July 1st 2003 new rules have been implemented within the corporate sector as relates to capital gains from what is referred to in the legislation as business related shares (as differentiated from capital investment shares). From January 1st 2004 the new legislation will enter into full force and effect, with the result that Sweden, in competition with other countries, such as The Netherlands and Denmark, will be able to offer the following.

· No income tax on dividends received from business related shares
· No income tax on capital gains from sales of business related shares
· No withholding tax on dividends from Swedish companies
· No withholding tax on interest costs
· Absence of rules regarding thin capitalization
· Interest costs are deductible irrespective of degree of leverage and irrespective of whether such costs are related to acquisitions of shares which are exempted from dividend tax and capital gains tax
· No stamp tax on share transfers
· No capital issue tax
· One of the lower corporate income taxes in Europe (28 %) and in addition thereto advantageous possibilities to fiscal credits by creating a profit periodisation reserve (Sw. periodiseringsfond) through an allocation to a reserve of up to 25 per cent of net profits under a period of six years
· Comprehensive network of double tax treaties pursuant to which withholding taxes on dividends from other countries is reduced to 0-15 per cent
· A modern and accessible corporate law regime with a relatively low requirement on minimum share capital in Swedish limited liability companies at SEK 100.000

The new rules
The below presentation is merely intended to provide a general overview of the most significant aspects of the new legislation and is accordingly not intended as a complete and comprehensive description of the new legislation.

Business related shares and capital investment shares.
A non-quoted share shall always be considered a business related share. There are no requirements as relate to holding time.

A quoted share shall always be regarded as a business related share if the legal entity that owns the share possesses at least 10 per cent of the votes in the relevant entity, or if the shareholding in question is motivated by the business operations of the legal entity owning the share, or of any subsidiary of such entity. If a quoted share is sold before it has been owned for at least one year, it will cease to be regarded as business related within such a period.

If a share is not business related it is considered a capital investment share.

Foreign companies
The definition of business related shares also includes shares in foreign entities provided that the foreign entity in question is subject to a similar tax regime as that which applies to Swedish limited liability companies or Swedish economic associations (Sw. ekonomiska föreningar) with the same type of income. The requirement as relates to similar tax treatment is considered fulfilled if the foreign entity is subject to a corporate tax rate of at least 15 per cent and provided further that the taxable income of such entity is calculated in a similar manner as applies according to the Swedish rules.

Shares in trading partnerships and shares which are held by trading partnerships

Shares in trading partnerships and shares held by such partnerships are exempt from application of the new rules as far as relates to exemption from dividend taxes and capital gains on business related shares. The same applies for foreign entities taxed as partnerships.

Dividends and capital gains
Dividends and capital gains on business related shares are tax-exempt. Losses on such shares are correspondingly not tax deductible. If a share in a foreign legal entity is business related then dividends and capital gains on such shares are tax-free under the same conditions as apply for Swedish shares.

Rights derived from a holding of business related shares, such as subscription rights (Sw. teckningsrätt), fraction rights (Sw. delrätt) and warrants (Sw. teckningsoptioner) are subject to the same rules as apply in general to business related shares.

Dividends and capital gains on capital investment shares are taxable whereas losses on such shares are tax deductible against profits on the same type of shares.

If a business related share is transformed into a capital investment share, then the acquisition cost will be considered as being the market value at the time of the transformation. This is to avoid that a decrease in value on business related shares may be transformed into a tax deductible capital investment loss.

If a capital investment share is transformed to become a business related share then the transformation in itself will have no other tax consequences than such that follow from the transformation in itself.

Shareholding companies
The special rules that currently apply to Swedish trust companies (Sw. förvaltningsbolag) and which include restrictions as relate to tax-free dividend payments and group contributions, will be abolished. These companies will in all essential respects become subject to the same rules as apply to companies involved in other areas, as far as concerns dividends, group contributions and capital gains. Transitional regulations will be implemented that allow trust companies up until the end of 2004 to divest shares to their physical owners at a price corresponding to the company’s taxable acquisition cost, but without withdrawal taxation. It should be observed however, that the special rules regarding employment taxation (Sw. tjänstebeskattning) on dividends from shares in close companies (Sw. fåmansbolag) may become applicable in which case the physical owner’s taxable acquisition cost for the shares will be determined as the sum of the taxable value with the divesting company and such amount as the physical owner is liable to account for as income for services rendered.

Rules that counteract trade with so called shell-companies within the corporate sector

A shell-company (Sw. skalbolag) exists on the occasion of a sale of an unquoted company, if the sum of cash means, securities and similar assets in the divested entity exceeds a comparison amount consisting of half the consideration for the company. To the sum of cash means and similar shall be added a fair market value of other assets at the time of the divestment, provided such assets have been acquired no later than two years before the divestment and provided also that the assets have no business relationship with the operations that the company has conducted over the past two years. Such assessment shall also take into account any indirect ownership.

In addition to the above there are a number of specific rules as relate to repurchase of assets etc. that will not be dealt with here. We would, however, recommend that professional advice is sought in cases of uncertainty as relates to whether a company that is subject to a sale shall or shall not be considered a shell-company.

If it is the case that a shell-company is in question, and a so called shell-company declaration (including a particular form of shell-company financial statement) has not been filed with the tax authorities within 30 days from the divestment occasion and security has not been placed (should the tax authorities require such security for the company’s untaxed profits) then a sanction will apply to the effect that the entire purchase consideration will become taxable.

Exemptions from the shell-company regulations apply if the company being sold is a quoted company or in the event of a winding-up or bankruptcy, or if the company is a foreign company that is not taxable in Sweden. The travail préparatoire further stipulate that the shell-company rules will be applied only in exceptional cases if the divested shares constitute a minority holding and the seller does not have any influence over the company, either himself or in combination with other minority owners.

Assets packed into companies
No general rules will be implemented to counteract assets being packed into companies. It needs to be observed, however, that the restrictions that exist regarding so called withdrawal taxation (Sw. uttagsbeskattning) and their exemptions pursuant to the arm’s length rules apply. In one respect, however, special rules are implemented so as to avoid asset packing in companies, should such asset packing concern residential properties that are owned by close companies. The rule regarding residential properties has been technically developed so as to ensure that the company will be considered as having divested and thereafter acquired the property at a fair market value. Special transition rules will be implemented.

Limited deductibility for capital losses on real estate
A capital loss on a property may only be deducted against the capital profit on real estates held by the company or another company within the same group. Normally this restriction does not apply on real estate used in business operations.

Intra-group share transfers
The current rules regarding intra-group share transfers will be abolished. Postponements granted with respect to payments of capital gain taxes according to previous regulations will normally be recognised.

Withholding tax
Foreign equivalents of Swedish companies that are entitled to receive dividend payments tax-free are exempt from paying withholding taxes on dividends from Swedish companies.

CFC rules
The Government’s intention has been to implement new and more extensive CFC rules (controlled foreign companies) simultaneously as the other rules mentioned herein. This has however not been possible, why new CFC rules will be implemented at a later date.

Entry into force
The rules concerning tax exemption for capital gains will enter into force with regard to all companies on July 1st 2003. The remaining rules will come into force on January 1st 2004 for companies with financial years corresponding to the calendar year. For other companies the “old rules” will apply (however with the exception of the new capital gains rules) for the entire financial year starting before January 1st 2004.

Hamilton & Co law firm is principally active within the spheres of Swedish and international business and financial law. As legal advisors to Swedish and foreign companies, banks and public enterprises, we have, over the years, built up a comprehensive and thorough competence within the entire area of business law.

Hamilton & Co is represented in Stockholm, Falun, Gothenburg, Karlstad, Malmö, Växjö, and London.