Sweden: Swedish Limited Liability Companies As Holding Companies In International Corporate Structures

Introduction

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 1^st 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 1^st 2004, the legislation will enter into full force and effect and will include also new CFC (Controlled Foreign Corporation) regulations, 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 lowest corporate income tax rates in Europe (28 %) and in addition thereto advantageous possibilities to fiscal credits by creating a tax allocation reserve (Sw. periodiseringsfond) through reservations of up to 25 % 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 %

• 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 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.

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 % 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.

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 15,4 % 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 held by such partnerships are exempt from application of the new rules as far as relates to exemption from dividend taxes and capital gains taxes on business related shares. The same applies for foreign entities taxed as partnerships.

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.

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 engaged in other types of business, 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.

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 equal to 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 prior to 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.

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 fair market value. Special transitional rules will be implemented.

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 to real estate used in business operations.

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.

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.

Regarding foreign non equivalents of Swedish companies, dividends are liable to a 30 percent withholding tax. Depending on the shareholders residency the rate can be reduced in accordance with the provisions of a double taxation treaty. Sweden has a comprehensive network of double taxation treaties pursuant to which withholding tax on dividend is reduced to 0-15 %.

In an effort to prevent and hinder tax planning measures involving transactions with low-taxed foreign legal entities – which may cause the Swedish tax base to be weakened – it is now proposed that new CFC rules (Controlled Foreign Corporation) shall be implemented.

The current Swedish CFC-regulations apply if a Swedish tax subject directly possesses at least 10 % of the votes or the capital in a low-taxed foreign legal entity, andprovided also, that at least 50 % of the votes or capital in that entity is owned or controlled, directly or indirectly, by Swedish tax subjects. If the CFC rules become applicable, the Swedish tax subject will be taxed for the profits of the low-taxed foreign legal entity as for business income (Sw. inkomst av näringsverksamhet). Operational losses are not deductible and may only be utilised against operational profits from the low-taxed foreign legal entity in subsequent years. As is evident from the above, at least 10 % of the votes or capital must be owned directly, which means that these rules are not applicable if the shares are held indirectly by a Swedish tax subject.

The proposed new CFC regulations will in brief have the following effect.

• Low-taxed foreign income is defined as income that is subject to a tax rate of less than 15,4 %. In deciding whether an income is a low-tax income, the net income shall be calculated in accordance with Swedish accounting principles and in the same manner as if the foreign entity had been a Swedish limited liability company (Sw. Aktiebolag). The possibility to assign a share of the income to a tax allocation reserve (Sw. periodiseringsfond) will however not apply when making such calculation. Deductions are permitted for non-utilised deficits in the foreign entity’s operations over the past three tax years

• Shareholders in a CFC company are those who directly or indirectly (through other foreign legal entities) – and in some cases jointly with other persons in an interest group – possess or control at least 25 % of the foreign legal entity’s votes or share capital at the expiration of the shareholder’s taxation year. In this respect the rules have been expanded to also include indirect ownership. Previous rules requiring that at least 50 % of the votes or share capital be controlled by a Swedish tax subject have been removed.

• No general exemptions from CFC taxation are introduced for operations conducted by banks, credit institutes or other financial companies, and this applies irrespective of whether such operations are subject to license requirements or not. Within the EEA-area the application of the CFC-regulations shall however in principle be limited to certain intra-group activities.

• International shipping operations conducted by a legal entity resident within the EEA-area are excluded from application.

• Further, and pursuant to a special rule, the income of a foreign national will not be regarded as low-taxed if it is received by a foreign legal entity that is resident and taxable for income tax in a state or other jurisdiction or part thereof that is included in a special list. This list includes countries with which Sweden has double tax treaties, but also other countries. The ambition has been to subject all countries to a test and to determine on country-by-country basis whether an exception shall be allowed, so as to increase the predictability for the benefit of tax subjects and tax authorities.

• The branch rule – income from branch (a permanent place of establishment) in a CFC jurisdiction which is not taxed at the level of the legal entity possessing the permanent place of establishment – will under the CFC-regulations be considered as having been generated from a separate foreign legal entity resident in the CFC-state to the effect that the legal entity possessing branch will be taxed for such income.

• If the CFC regulations apply, the CFC entity’s income will be calculated using Swedish tax rules. A special P&L account and balance sheet will need to be produced. A shareholder in a CFC-entity is further obliged to provide identity details for the CFC-entity together with details of the share of votes and capital that such shareholders holds in the company.

• If a shareholder is taxed according to the CFC-regulations, such shareholder will be permitted to reduce the tax due and payable in Sweden by an amount corresponding to his part of any tax paid in the CFC country. There is however no right to make such a deduction for possible CFC tax which has been paid by a group company abroad.

The Swedish legislator is of the opinion that the proposed CFC-rules are representative of such countermeasures that are permissible under the EU code of conduct, and has further exercised great effort to explain the CFC-rules in the travail préparatoire in order to show that the rules are consistent with tax treaties entered into by Sweden as well as with EU legislation. There is no room here to discuss whether this conclusion is correct or not. It appears very likely however that this position will not remain unchallenged for long.

The rules concerning tax exemptions for capital gains entered into force with regard to all companies on July 1^st 2003. The remaining rules including the new CFC-regulations will come into force on January 1^st 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 1^st, 2004.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.