The essential Tax Law in Sweden

These are the highlights if you want to know more about the essential Tax Law in Sweden. This entry was drafted by Moll Wendén. Link to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case Moll Wendén is an excellent option in Sweden.

• General

Limited companies and certain other legal persons must pay a corporate tax of 22 per cent. The tax is deducted from the enterprises pre-tax results of operations, subject to certain fiscal adjustments. The tax rate for individuals as regards income from employment and partnerships is progressive and varies between 28 and 58 per cent depending on the amount of income. Capital gains tax varies between 20 and 30 per cent.

• Taxation of resident companies

All income received by a company is dealt with together, regardless of whether it originates from different kinds of activities. Thus, losses from one activity may be set off against income from another. Losses from business activities carried out abroad may be set off against income from Swedish activities if there is no tax treaty stipulating that the foreign income should be tax exempt. Calculation of a company’s taxable income is based on the annual report prescribed by civil law and the fiscal income assessment is based on the realised results of operations.

• The allocation reserve

A deductible allocation reserve may be made at maximum of 25 per cent of net earnings prior to allocations for the financial year. The allocation must be recognised in the financial statements of the limited company.

The allocation reserve must be reversed for tax purposes no later than in connection with the tax assessment of the 6th fiscal year following the year when the provision was made. If no voluntary reversing entry has been made, the remainder will be reversed mandatorily. Each year’s provision constitutes a reserve of its own. Consequently, a company can have a maximum of six allocation reserves at time. The company is not required to make payments into a special purpose account or similar.

• Depreciation and deductions

Normal expenses incurred in the course of business are deductible when determining the taxable income.

Assets which are held for permanent use may be depreciated on the bases of the actual acquisition cost. Companies may choose between using the declining balance method at 30 per cent per year and the straight lane method at 20 per cent per year. Assets with an expected useful life of less than three years may be written off at once, as may assets of minor value.

Real estate is depreciated using the straight lane method over the expected useful life of the property. Usually commercial properties may be depreciated by 2 – 5 per cent per annum, factory premises by 4 per cent and office properties by 2 per cent per annum.

Interests and royalties are generally fully deductible.

General Swedish taxes paid are not deductible according to Swedish law. Sweden has no rule on thin capitalisation. Consequently, there are no restrictions on interest payments between related parties, as long as these are made on an arm’s length basis.

Dividends paid are not deductible.

If the company suffers a loss one year the loss will become deductible the following year. The taxpayer may not choose when to use the loss but it may be carried forward without time limitation if the loss is not covered by profits in the subsequent year. However, some limitations apply to this rule if the company suffering the loss is sold.

• Group taxation

Limited companies are treated as groups where a parent company directly or indirectly holds more than 50 per cent of the voting powers of another limited company.

A group is not a taxable entity in it self but companies in the same group can make certain fiscal redistributions of their earnings. The owner may through intra-group transfers obtain a tax allowance if the donee books the transfer as taxable income.

For intra group transfers to take full legal effect the following requirements apply. The companies concerned must be Swedish limited companies. The parent company must have owned more than 90 per cent of the shares in the subsidiary during the entire financial year or both the donor and the donee must be subsidiaries of the same parent company which owns more than 90 per cent of the shares in each of the companies. Subsidiaries, which render or receive transfers, must have been holy owned during the entire fiscal year for both donors and donees or since the subsidiary commenced conducting business activities in some kind or other. Either the donor or the donee may be housing, investment or management company. Both the donor and donee must disclose the intra group transfer during the same fiscal assessment year in the tax return. Nor must shares in the subsidiary constitute a stock asset in the parent company.

In some cases, a parent company is exempt from tax on dividends received from foreign subsidiaries if the foreign company is subject to a tax at a rate comparable to Swedish taxation of similar entities or is recognised as a company in a Double Taxation Treaty to which Sweden is a party.

• Taxation of foreign companies

Whereas a company that has been duly incorporated and registered under Swedish law will be taxed in Sweden on its world-wide income (total tax liability), a foreign company will only be taxed for income deemed to derive from Swedish sources (limited tax liability). The latter rule applies mainly to income attributable to real property or to a permanent establishment located in Sweden. A foreign company will be considered to have permanent establishment in Sweden when its operations are carried out through a fixed place of business, i.e. a branch office. An agent with power to conclude contracts on behalf of a company will normally qualify as a permanent establishment. Unrelated agents, for example a reseller, will not constitute a permanent establishment as long as the assignment carried out on behalf of the foreign company is within the agent’s usual type of business.

• Business related shares

Sweden has rules regarding business related shares (Sw. näringsbetingade aktier). The rules apply to limited liability companies (Sw. aktiebolag) as well as partnerships (Sw. handelsbolag).

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 per cent 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

Dividends from unquoted shares and other business-related shares are tax free for the holding company with only a few exceptions. There are for example exceptions for dividends from controlled foreign companies in certain tax haven countries.

Generally, capital gains on sale of business related shares will be tax free for the holding company. However, a few exemptions worth mentioning apply to this general rule. If a business-related share is quoted it must have been held for a year or more. Another exception regards sales of shares in shell companies, i.e. companies holding primarily lots of cash or other liquid funds but few other assets.

• Double taxation

Swedish domestic law provides two main alternatives for avoiding international double taxation:

• Foreign tax may be deducted as a cost when calculating the taxable income of the company, provided that the income in question is taxed in Sweden.
• Foreign tax may be credited against Swedish tax using the over-all method. However, the foreign tax assessment must be final, compared to Swedish tax, and levied on the basis that the income originates from the country in question.

The latter alternative may be utilised even if there is a treaty covering the situation provided that the treaty does not prescribe exemption from Swedish tax.

Sweden also has an extensive network of tax treaties. There are no Swedish laws on treaty shopping, but provisions on this subject, mainly concerning dividends, may be included in some of the more recent treaties. Most of the treaties are based on the ACCEDE model convention.

• Partnerships and limited partnership

Partnerships and limited partnerships are legal persons that can enter into legal and binding agreements etc. Despite this, it is not the partnership/limited partnership that is subject to pay tax on its income. Instead each of the co-owners is taxed on his share of the profits of the partnership.

The co-owners of the partnerships will be taxed in Sweden on income earned by the partnership through its business transactions in Sweden. If the overseas owner in a partnership is an overseas company, the tax charge will be the same as had the operations been conducted through a branch office.

Although the co-owners are subject to tax on the income of the partnerships, a joint assessment of income must be made for the partnership as such. The co-owners will then be taxed for their shares of the profits of the partnership.

• Value added tax VAT

VAT is levied on the sales price of taxable goods or services. At the present three rates apply, a standard rate of 25 per cent and two reduces rates of 12 and 6 per cent. The reduced rates of 12 per cent applies to food (excluding alcoholic beverages), hotel services, camping sites and ski lifts while the lower reduced rate of 6 per cent applies to for example daily papers, magazines, books and passenger transportation. Anyone who commercially trades taxable goods or services in Sweden is liable for VAT. Every two months, or if the company is trading with other EU member states every month, the difference between the VAT received from the selling of goods and services and the VAT paid for the acquisition of goods and services is paid to the state. When the latter exceeds the former the company will receive a refund.

• Individual taxation

Residents of Sweden pays Swedish tax on all income irrespective of whether the income is earned inside or outside the country. You will be regarded as a resident of Sweden if you stay in the country for more than six months, or if your fixed domicile lies in Sweden. You can also be regarded as a Swedish resident if you have some connection with the country, for example Swedish citizenship, property or business operations. The latter pre-supposes, however, that you have previously been regarded as a fiscal residence of Sweden, i.e. if your true domicile has been in Sweden.

The tax liability in Sweden for non-Swedish residents is limited to the income earned in Sweden.

The income tax system somewhat simplified consists of three brackets;

• Tax bracket 1: Municipal income tax on taxable income not exceeding SEK 438 900 (2017). Varies between circa 28 and 33 per cent depending on municipality. The average municipal tax during 2016 was approximately 32 per cent.
• Tax bracket 2: State income tax of 20 per cent in addition to the municipal income tax for incomes exceeding SEK 438 900 (2017).
• Tax bracket 3: Surtax of 5 per cent in addition to the municipal income tax and state income tax on incomes exceeding SEK 638 500 (2017).
• The highest marginal income tax rate is thus between circa 53 and 58 per cent depending on income and location.

A company is obliged to pay preliminary tax when paying salary to its employees. The preliminary tax to be paid in respect of each employee varies depending on the employee’s domicile and his or her expected annual income. In addition, each employer is obliged to pay a statutory payroll tax of (31,42 per cent) of the remunerations paid.

Individuals must pay a 20 to 30 per cent tax on capital gains.

• Other taxes

Property tax

The state property tax on owner-occupied houses and apartment buildings was abolished in 2008. Instead, a “local/municipal fee” was introduced with a cap, to be adjusted annually and was indexed to the so-called income base amount (inkomstbasbelopp), which tracks the average nominal income. The state property tax, however, still applies to properties which are not considered as residential properties, i.e. an unbuilt plot of land.

Excise duties

In addition to general VAT, duties are imposed on several goods. Notable examples include fuel, tobacco, electricity and alcohol. Rates on fuel are set to increase automatically and annually from the year 2017 at a rate calculated using the consumer price index (CPI) plus two percentage points. In practical terms, the above means Sweden may have the highest fuel taxes in the world by the year 2020.

VAT is levied on all excise duties.

Stamp taxes

Certain stamp taxes apply in connection with transfer of real estate and issuing of mortgages in real estate, companies (floating charges), air crafts and vessels. The stamp taxes applicable to real estate are further described under “Real Estate”.