Swedish Holding Companies

Swedish Holding Companies

Sweden — A Big Surprise!

CLAS RAMERT explains the advantages of Swedish holding companies.

HIGH TAX COUNTRY — I suspect that this is the widespread reputation of Sweden; and whilst this might be a fairly true picture for individuals, it is not quite the same for companies.

The tax rate for companies is 28% in Sweden, which is rather low by international standards. There are also ways of keeping funds untaxed within a company for long periods of time that 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, with the exception of a few years, has been in government for decades and wants to encourage Swedish owners to let profits accumulate in their companies. Thus, as long as profits stay in the company, or the dividends are distributed to individuals or companies resident outside of Sweden, the tax impact will often be very interesting and may surprise international tax planners.

From 1 July 2003, new rules have been adopted regarding dividends and capital gains on shares in a Swedish holding company. Nowadays, such capital gains and dividends are usually tax free and to this, one can add the facts that Sweden is inside the European Union (EU), has an extensive network of double tax treaties, no thin capitalisation rules and no withholding taxes on interest. Put these pieces of favourable tax treatment together with other Swedish rules — or lack of rules — and 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 is a list of the principal characteristics of Swedish holding companies today.

Some comments to these features are listed below. These are not complete in every aspect, but will hopefully satisfy the initial curiosity of UK tax practitioners.

Tax free dividends

On 1 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.

This means that the shares held by a holding company would usually be regarded as 'business related' and dividends from unquoted shares and other 'business related shares' are tax free for the holding company with only a few exceptions. For example, there are exceptions for dividends from controlled foreign companies in certain tax haven countries. Profits in such companies shall, according to Swedish tax law, be taxed in Sweden immediately 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.

No capital gains

From 1 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.

Again, there are a few exceptions worth mentioning. If a 'business related share' represents 10% or more of voting power, it must have been held for a 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 and 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.

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 a tax haven or if the lender is also a shareholder. Therefore a tax haven investor would preferably put low share capital into the Swedish holding company and instead give the company a loan.

No thin capitalisation rules

Sweden has no thin capitalisation rules. This means that a shareholder domiciled outside of Sweden may choose 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. However, since the tax law does not contain any thin capitalisation rules, it is very unlikely that the Swedish tax authorities would try to make reclassifications unless the tax planning has been extremely aggressive.

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 that 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 controlled foreign 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.

Withholding tax on dividends is rare

According to the Swedish internal tax law, the withholding tax on dividends is 30% if the recipient is domiciled abroad. However, there are some exceptions that may apply if the recipient is a company. Furthermore, in most of Sweden's 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 again be inclined to give loans to the Swedish holding company in order to receive interest.

Company creation

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; there is no such charge in Sweden.

Favourable tax credit rules

If the same income is 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.

Low effective corporate tax rate

All income in a Swedish company is taxed at a flat rate of 28%. Loss carry forwards are possible without any time limit; but 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 large and long-life machinery, such as ships, may be depreciated over five years.

Sweden is a member of the EU

As a member of the EU, Sweden is part of the intra-union system allowing the free flow 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.

Accounting in euros is possible

For the last few years, a Swedish company may choose between preparing its accounts in Swedish crowns or in euros. If the international investor is reluctant to risk exposure to fluctuations in the Swedish crown, there is an option to let the Swedish holding company do its accounting — including official annual reports — in euros.

Double tax treaties

For decades, Sweden has been very active in concluding double tax treaties. For a holding company with global activities it is essential to be able to refer to tax treaties and this is indeed possible in Sweden.

Low advisers' fees

Generally speaking, advisers' fees are low in Sweden and Swedish advisers usually have an excellent command of the English language.

Relations to foreign tax authorities

The unique characteristic 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 fewer problems in relation to tax authorities outside of Sweden than a holding company located in a real low tax country.

Clas Ramert MBA was Volvo's senior tax officer from 1983 to 1996. He now runs a small consulting company and can be contacted by telephone on +46 31 711 20 70 or e-mail: clas@ramert.se.

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