Holding company - general considerations
Definition of holding companies
A holding company is a company that owns shares in other companies, and may be involved in the management of its subsidiaries and perform other tasks, such as a head office function and/or financing or licensing activities. Although no rules would prohibit this, holding companies do not typically engage in operating businesses.
Company law regarding holding companies
A Swedish limited liability company, aktiebolag (AB), may be either a private company or a public company. Only public companies may invite the public to subscribe for shares. Registration as a public company is also required if shares are to be traded on the stock exchange or other organized marketplace. Under the Companies Act, the minimum share capital for a private company is SEK100,000 ($14,756) and for a public company it is SEK500,000 ($73,780). A private company is, in most cases, suitable as a holding company.
The procedure to incorporate an AB generally takes several weeks. Most often, however, an investor needs not bother with this procedure since it is much easier to acquire an off-the-shelf company and adapt its articles of association to the needs and intentions of the investor. The purchase price for an off-the-self-company is about €1,000 ($1,336), plus a compensation for the share capital.
An annual report must be prepared for each financial year, comprising a report on the management of the company's affairs, an income statement, a balance sheet and notes to the financial statements. A parent company must prepare consolidated accounts. Large companies and groups must also present a statement of changes in financial position. Comparative figures for the preceding financial year must always be presented.
No later than one month after the adoption of the financial statements and at the latest seven months after the end of the financial year, a certified copy of the annual report must be filed at the Swedish Companies Registration Office, where it is available to the public.
Taxation of holding companies
The corporate tax rate is 28%. All corporate income is taxed as business income, including income from capital. Companies are not subject to Swedish net wealth tax and Sweden does not have a capital contribution tax.
Swedish resident companies are taxable on their worldwide income. Generally speaking, a Swedish company is resident in Sweden if it is registered there under the Swedish Companies Act. The concepts "effective management" and "management and control" are not used as criteria for unlimited tax liability.
A company created under foreign law and registered abroad would thus not have unlimited tax liability in Sweden, even if managed and controlled here but, on the other hand, a company registered in Sweden under the Swedish Companies Act would have unlimited Swedish tax liability even though not managed and controlled in Sweden but abroad.
Tax adjustment reserve
Swedish companies are allowed to create a tax adjustment reserve through an allocation of up to 25% of its net profits. The reserve must be dissolved (added to income) at the latest the sixth year after the year the allocation was made. Full utilization of the reserve will in the long run result in an effective corporate tax rate of about 25.5%.
A fictitious "interest" is levied on a company's tax adjustment reserves. The company is taxed for a standard income of, at present, about 3.4% of its total tax adjustment reserves. The regulation about the interest was recently enforced by the Swedish parliament and entered into force for financial years starting January 1 2005 or later.
Dividends
Incoming dividends
Under the fairly new Swedish rules governing participation exemption, dividends received by a resident company from another resident company on business-related (organizational) shares are tax-exempt. The extension does normally not apply to dividends on shares held as inventory.
Unquoted shares are always deemed to be business related if they constitute fixed business assets. There is no minimum holding period for unquoted shares to qualify for participation exemption.
Quoted shares that constitute fixed business assets are deemed to be business related if they represent at least 10% of the company's voting rights or are otherwise considered necessary for the business conducted by the shareholding company or its affiliates. A further requirement for quoted shares is a minimum holding period of one year. In practice, the exemption is granted upon distribution. The dividends become taxable, however, if the shares are alienated or cease to be business related within one year of the date which they qualified as business related.
The rules do not apply in respect of partnerships and holdings in partnerships.
Swedish tax law also contains rules on tax exemption for dividends received from a foreign legal person. Generally, dividends from a foreign company resident within the EU are exempt under specific rules, provided the dividends would have been exempt if the distributing company had been Swedish. Dividends also from companies resident in countries outside the EU are tax exempt, provided the dividends would have been exempt if the distributing company had been Swedish, and the foreign company is deemed "equivalent to" a Swedish AB. It is not clear from the legislation if the comparison should be based on a company law or tax law point of view, or perhaps both.
If a taxpayer wishes to obtain certainty regarding the application of the rules, an advance tax ruling may be requested from the Swedish Board for Advance Tax Rulings. It normally takes about six months to receive a ruling.
Withholding taxes on outgoing dividends
A withholding tax of 30% is under domestic law levied on dividends paid by a Swedish company to a non-resident company or individual. However, this tax is reduced or waived in certain circumstances both under domestic law and most tax treaties. Withholding tax is not levied on dividends paid to a legal person residing in an EU member state, provided the shareholding amounts to at least 25% of the share capital of the distributing company and certain other conditions in the EU Parent-Subsidiary Directive are fulfilled.
Moreover, under domestic regulations no withholding tax is levied on dividends to foreign companies that are equivalent to a Swedish AB and hold the Swedish shares for business purposes. Hence, dividends for example to US parent companies are normally not subject to any Swedish withholding tax.
Royalties and similar payments such as leasing fees paid from Sweden are not subject to a withholding tax, but may be taxed as income from business carried on through a permanent establishment in Sweden. This means that royalties and similar payments paid to a non-resident company are subject to tax at the ordinary company tax rate of 28% on the net royalties. However, the tax treaties with most industrialized countries provide for exemption from Swedish taxation.
Double tax treaties protection
Relief from double taxation for resident taxpayers may be provided under a tax treaty. In such case, the foreign dividend withholding tax rate is lowered, often to 5% or even to 0%.
For incoming dividends, the relief generally takes the form of a credit for foreign withholding taxes.
Capital gains and losses
Capital gains tax on the sale of shares
Capital gains derived from the sale of shares and other securities in resident companies are not subject to tax under the Swedish participation exemption rules, provided the shares constitute a business-related holding for the company.
Unquoted shares are always deemed to be business-related holdings if they constitute fixed business assets. There is no minimum holding period for unquoted shares to qualify for the tax exemption.
Quoted shares that constitute fixed business assets and have been owned, at the time of the sale, for at least one year qualify as business related if they represent at least 10% of the company's voting rights or are otherwise considered necessary for the business conducted by the shareholding company or any of its affiliates.
The tax exemption rules also apply to holdings in foreign companies, provided the foreign company is deemed "equivalent to" a Swedish AB.
The participation exemption rules do not apply in respect of partnerships and holdings in partnerships.
If a shareholding does not qualify for participation exemption, the capital gain will be subject to Swedish corporate income tax at the normal corporate rate.
Losses on shares
Capital losses on business-related holdings are not tax deductible, that is, a loss is not deductible for tax purposes on such holdings where a gain would have been tax-free.
Capital losses incurred on the sale of shares and other securities not related to the company's business (for example, portfolio investment) may only be set off against gains on the same type of asset; any surplus of such losses may be carried forward indefinitely to be offset against future gains on the same type of assets.
Deductibility of unrealized losses on shares
For tax purposes, a Swedish holding company should report the shares in its subsidiaries at their acquisition value. Accordingly, unrealized losses on shares held for business purposes cannot be deducted.
For shares and other securities held as inventories, a Swedish company should report them at their fair market value and could consequently generally deduct unrealized losses.
Capital gains on shares in shell companies
The disposal of a so-called "shell company" may give rise to capital gains taxation under certain conditions. A shell company is defined as a company whose liquid assets, that is, cash and similar assets, are more than one-half of the agreed purchase price of the company.
Exemption may be granted if a special shell company tax return is submitted within 30 days from the disposal. Hence, in most cases it is fairly simple to avoid taxation. The rules aim to prevent tax evasion by trade in companies with only liquid assets.
Deductibility of underlying goodwill
A Swedish holding company has to report the shares in its subsidiaries at the historical cost of the shares, regardless of whether this value includes any goodwill. This value may not be depreciated. Hence, the Swedish holding company is not permitted to deduct any underlying goodwill.
Costs
Deductibility of interest costs
As a general rule, all interest expenses related to the acquisition of Swedish and foreign subsidiaries are deductible for a Swedish holding company. If a loan is recognized for company law purposes, it will also be treated as a loan for tax purposes and the interest will be deductible.
Deductibility of acquisition costs
Costs related to an acquisition of shares are not immediately deductible for tax purposes. The cost is added to the price paid for the shares. Since shares in a subsidiary normally can be sold tax-exempt under the participation exemption rules, acquisition costs will then not be tax deductible.
Costs for a planned acquisition of shares that is not carried through are tax deductible the year the costs incurred.
Loss carry-forward
Given that all types of income of companies form one category of business income, all ordinary losses (except losses on portfolio investments and real estate) may be set off against the business income of the current year. Any surplus losses may be carried forward indefinetely. Losses may be carried back through the dissolution of a tax adjustment reserve.
In case of a change of ownership of a company with loss carryforward, restrictions apply with respect to the extent to which the loss company may use them or offset them against profits in other group companies through group relief.
Swedish controlled foreign corporation rules |
New controlled foreign corporation (CFC) rules entered into force on January 1 2004 and apply to fiscal years starting after the year-end 2003. Under these rules a legal entity liable to tax in Sweden and holding, directly or indirectly, at least 25% of the capital or the voting rights in a foreign legal entity at the end of the taxable entity's fiscal year will be subject to CFC taxation if the foreign legal entity is deemed low-taxed (CFC). The foreign legal entity is deemed low-taxed if it is not taxed on its income or if it is taxed at a tax rate below 15.4%. The mentioned tax rate is computed on the net income calculated using Swedish tax rules. Legal entities resident in countries mentioned in a "white list" are deemed not to be CFCs, even if they do not fulfill the criterion of being taxed at a rate of at least 15.4%. However, certain activities in some of the countries are excluded from the white list, for example, banking, financing, other financial activities, and insurance. Any activities of this kind excluded from the white list as to countries within the European Economic Area are excluded only if conducted intra-group. A company subject to the CFC rules is liable to Swedish tax on its share of the foreign legal entity's worldwide net income. |
Interest withholding tax
There is no withholding tax on interest payments in Sweden. However, if a loan is considered to be equity for tax purposes, the interest payments might become subject to Swedish dividend withholding tax.
Thin-capitalization rules
Sweden does not have thin-capitalization rules.
Group tax consolidation (fiscal unity)
Swedish tax law does not provide for filing of consolidated tax returns by a parent company and its subsidiaries, whether domestic or foreign, but domestic groups may bring about a netting of profits and losses by means of so-called group contributions, a form of group relief.
Such contributions may be made between a Swedish parent and its more than 90%-owned Swedish subsidiary and between such subsidiaries. The contributor may treat the contributions as an allowable cost and the recipient treats them as taxable income. This means that losses of one company may be set off against profits of another company in the same group. The qualifying relationship must have existed throughout the financial year.
There are Swedish legal precedents establishing that group contributions are also allowed between Swedish companies with a foreign parent resident in a treaty country, where the relevant treaty contains a non-discrimination clause. Application of the non-discrimination under EU regulations gives the same result.
Taxation of shareholders in holding companies
Taxation of resident shareholders
For a Swedish-resident corporate shareholder, the shareholding in the Swedish holding company will typically qualify for the participation exemption.
Dividends and capital gains on shares in the Swedish holding company will be subject to Swedish corporate income tax if the shareholding does not qualify for participation exemption.
If a shareholder in the Swedish holding company is an individual tax resident in Sweden, dividend and capital gains will be subject to Swedish personal income tax. Generally, dividends and capital gains are subject to a flat tax rate of 30%. If the company is deemed as a closely-held company, dividends may be taxed as employment income and subject to progressive rates of up to 57%. However, certain tax reliefs are normally granted.
Taxation of non-resident shareholder
In general, non-residents holding shares in a Swedish holding company are not taxed in Sweden on capital gains realized at the disposal of their shares.
Individuals who have been Swedish tax residents at any point in the previous 10 years are subject to tax on capital gains on shares in Swedish companies, under domestic tax regulations. However, most tax treaties limit or waive Sweden's right to impose the capital gains tax.
If a non-resident holds shares in a Swedish company through a Swedish permanent establishment, any capital gains realized on those shares will generally be exempt under the participation exemption.
Tax treaties
Sweden has an extensive tax treaty network and has entered into tax treaties with more than 80 countries. Treaties have been concluded with all industrialized countries and almost all major developing nations. The treaties are based on the OECD Model Conventions or the UN Model.
For further information please contact:
Jörgen Graner
KPMG Bohlins AB
Tel: +1 212 872 3458
Email: jorgengraner@kpmg.com
