Post by Carl Philgren on Jul 15, 2009 23:24:55 GMT 4
Sweden: Participation in foreign companies
Ernst & Young
Carl Pihlgren
Participations in foreign companies has been considered as business-related holdings by the National Board of Advance Rulings because the foreign companies were considered as being equivalent to a Swedish company.
Capital gains on, and dividends from, business-related holdings are tax free in Sweden. In the Swedish income tax act a business-related holding is defined as a participation in a limited liability company or an economic association. Also foreign equivalents to the Swedish legal forms of business entities can be covered by the definition. It does not have to be an absolutely identical for the foreign legal entity and its Swedish counterparts. Instead the assessment should be done individually on a case by case basis.
The civil law comparison calls for the foreign legal entity to have the same characteristics as a Swedish limited liability company. In two new advance rulings from the National Board, the civil law comparison has been commented upon in more detail. A British private limited company has been considered to be the equivalent of a Swedish limited liability company despite the fact that the owners of the British entity can be made personally responsible for the company's liabilities without limitation in connection with liquidation. The same conclusion were reached in another case concerning a Russian limited liability company where the owners had a percentage in the entity in proportion to the contributed capital instead of the number of shares held.
In the comparison of the entities' tax situation, the National Board has stated that it is a requirement that the foreign entity should have such connection to the country in question if it is considered subject to tax in that jurisdiction. When the National Board dealt with a case concerning a private company limited by shares in Gibraltar, the question was whether the company also has to pay tax on its income and if the tax paid must be of a certain level. The company in question was subject to tax in Gibraltar according to the local general definition. However, it was exempted from actually paying any tax due to a special regulation.
One conclusion that can be drawn from the above mentioned advance rulings is that it is not a requirement, according to the reasoning of the National Board, that a foreign entity is actually subject to, and paying, tax in the foreign jurisdiction or that the tax paid is of a certain level, in order for the foreign entity to be considered as the equivalent of a Swedish limited liability company. In this context, it is enough that the foreign entity is subject to tax from a formal viewpoint and is covered by the foreign tax legislation. However, observation should always be paid to the fact that the Swedish controlled foreign company -rules may be applicable when it is a matter of low taxed foreign incomes. The Swedish tax authority has only appealed against the advance ruling regarding the Russian entity. In their opinion the civil law requirement is not met in this case.
Carl Pihlgren (carl.pihlgren@ey.com)
Swedish Tax Desk, New York
Ernst & Young
Carl Pihlgren
Participations in foreign companies has been considered as business-related holdings by the National Board of Advance Rulings because the foreign companies were considered as being equivalent to a Swedish company.
Capital gains on, and dividends from, business-related holdings are tax free in Sweden. In the Swedish income tax act a business-related holding is defined as a participation in a limited liability company or an economic association. Also foreign equivalents to the Swedish legal forms of business entities can be covered by the definition. It does not have to be an absolutely identical for the foreign legal entity and its Swedish counterparts. Instead the assessment should be done individually on a case by case basis.
The civil law comparison calls for the foreign legal entity to have the same characteristics as a Swedish limited liability company. In two new advance rulings from the National Board, the civil law comparison has been commented upon in more detail. A British private limited company has been considered to be the equivalent of a Swedish limited liability company despite the fact that the owners of the British entity can be made personally responsible for the company's liabilities without limitation in connection with liquidation. The same conclusion were reached in another case concerning a Russian limited liability company where the owners had a percentage in the entity in proportion to the contributed capital instead of the number of shares held.
In the comparison of the entities' tax situation, the National Board has stated that it is a requirement that the foreign entity should have such connection to the country in question if it is considered subject to tax in that jurisdiction. When the National Board dealt with a case concerning a private company limited by shares in Gibraltar, the question was whether the company also has to pay tax on its income and if the tax paid must be of a certain level. The company in question was subject to tax in Gibraltar according to the local general definition. However, it was exempted from actually paying any tax due to a special regulation.
One conclusion that can be drawn from the above mentioned advance rulings is that it is not a requirement, according to the reasoning of the National Board, that a foreign entity is actually subject to, and paying, tax in the foreign jurisdiction or that the tax paid is of a certain level, in order for the foreign entity to be considered as the equivalent of a Swedish limited liability company. In this context, it is enough that the foreign entity is subject to tax from a formal viewpoint and is covered by the foreign tax legislation. However, observation should always be paid to the fact that the Swedish controlled foreign company -rules may be applicable when it is a matter of low taxed foreign incomes. The Swedish tax authority has only appealed against the advance ruling regarding the Russian entity. In their opinion the civil law requirement is not met in this case.
Carl Pihlgren (carl.pihlgren@ey.com)
Swedish Tax Desk, New York