Robert Påhlsson is professor of tax law at the University of Gothenburg School of Business, Economics and Law.
Business taxation in sweden
The book aims to give the reader an orientation. With the help of the book simple questions can be solved immediately. The reader should also be able to recognize when there is a need for more detailed research that requires the use of Swedish-language materials.
Robert Påhlsson
This book deals with basic Swedish income tax law for sole traders, partnerships and limited companies, with regard to taxable income, deductible expenses and tax issues related to the annual accounts. In addition, separate chapters deal with special fields such as close companies, business transfers, taxation of groups and restructuring.
Robert Påhlsson
Business taxation in sweden
01 02 FnL1 EkZpcm1hIEpvaG4gUGVyc3NvbgRKb2hu AFNsmyg= 02 0040
ISBN 978-91-7678-903-2
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Business Taxation in Sweden Robert P책hlsson
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Preface Sweden is a small open economy in continuous coexistence with the outside world. Non-Swedish speaking people frequently and increasingly come into contact with Swedish tax law, in business as well as through expanding international exchanges with the Swedish universities. However, the laws and other legal sources are, in principle, still only available in Swedish. My aim with this book is to help change this, by making Swedish tax law more accessible to those who do not speak Swedish. After a brief examination of some constitutional aspects on tax law, the book covers the basic income tax legislation for sole traders, partnerships and limited companies with regard to taxable income, deductible expenses and tax issues related to the annual accounts. In addition, separate chapters deal with special fields such as close companies, business transfers, taxation of groups and restructuring. The book aims to give the reader an orientation. With the help of the book simple questions can be solved immediately. The reader should also be able to recognize when there is a need for more detailed research that requires the use of Swedishlanguage materials. Eleanor Campbell of Eleanor Campbell – Legal and Academic English has provided invaluable help with the English language and I thank her warmly. I am solely to blame for any remaining mistakes.
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Finally, I would like to thank The Foundation for Jurisprudential Research for the generous author grant that made it possible for me to write this book. Gothenburg March 2014 Robert P책hlsson
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Innehåll
Preface 5 Abbreviations 13 1 Introduction 15 1.1 General 15 1.2 History of Swedish taxes 16 1.3 Public revenue and tax policy 17 1.4 Taxes and other duties 19 1.4.1 General 19 1.4.2 Distinguishing between different types of taxes 20 1.4.3 Income tax 22 1.4.4 Social security contributions 23 1.4.5 Value added tax 24 1.4.6 Property tax 24 1.4.7 Excise duties/retail taxes 25 1.5 Sources of Swedish tax law 25 1.5.1 Introduction 25 1.5.2 EU law 25 1.5.3 General information on Swedish tax laws 26 1.5.4 Preparatory works 27 1.5.5 Case law 28 1.5.6 Administrative practice 30 1.5.7 Tax literature 31 1.5.8 Tax treaties 31
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2 Constitutional Requirements on Swedish Tax Law 33 2.1 Introduction 33 2.2 Legislative powers in the field of taxation 34 2.2.1 General 34 2.2.2 The demand for generality 34 2.2.3 Acts of Parliament a requirement for binding tax rules 35 2.2.4 Enforcement regulations 36 2.2.5 Ban on retroactivity 37 2.3 The ECHR and Swedish tax law 39 2.3.1 General 39 2.3.2 The requirement for fair trial etc. 40 2.3.3 Double jeopardy (ne bis in idem)? 40 2.4 The principle of equal treatment in Swedish tax law 42 2.4.1 Equality in EU law 42 2.4.2 Equality in the European Convention on Human Rights 42 2.4.3 Equality in the Swedish constitution 44 3 Swedish Income Taxation 47 3.1 Introduction 47 3.2 The scope of unlimited tax liability 48 3.2.1 General 48 3.2.2 Natural persons 48 3.2.3 Legal entities 49 3.3 The six-month rule and the one-year rule 50 3.4 The scope of limited tax liability 51 3.5 Tax climate for foreign investors 52 3.6 Tax treaties 53 3.6.1 Introduction 53 3.6.2 General on DTCs and their origins 54 3.6.3 Tax treaties – their purpose and content 54 3.6.4 The relation between DTCs and internal law 55 3.7 The concept of income 57 3.7.1 General 57
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3.7.2 Revenue 57 3.7.3 Expenditure 58 3.8 The fiscal year 59 3.9 The three income schedules 60 3.9.1 General 60 3.9.2 Earned income 61 3.9.3 Business income 61 3.9.4 Capital income 63 3.10 Tax-exempt income and non-deductible expenses 63 3.11 Treatment of losses 64 3.12 Tax rates and tax calculation 65 3.12.1 Earned income and business income 65 3.12.2 Capital income 66 4 Business Income and Corporate Form 67 4.1 Introduction 67 4.2 The relationship between accounting and taxation under Swedish law 67 4.3 Tax treatment of different corporate forms 70 4.3.1 Sole traders 70 4.3.2 Partnerships 71 4.3.3 Limited companies 72 5 Taxable Income 75 5.1 Introduction 75 5.2 Operating income 75 5.3 Withdrawals 77 5.4 Transfer pricing and CFC legislation 78 5.5 Financial income 80 5.6 Participation exemption 81 5.7 Fixed assets 81 5.8 Sale of real estate 82 5.9 Sales of shares and other securities 86 5.10 Insurance compensation 87 5.11 Other income 87 5.12 Tax-exempt income 88
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6 Deductible Business Expenses 89 6.1 Introduction 89 6.2 Operating costs 90 6.2.1 Stock items 90 6.2.2 Inventory, machinery, equipment etc. 90 6.2.3 Payroll expenses 91 6.2.4 Social security contributions 94 6.2.5 Pensions and insurances 96 6.2.6 Staff welfare 97 6.2.7 Entertainment 99 6.2.8 Travel 100 6.2.9 Company cars 101 6.2.10 Research and development 104 6.2.11 Sponsoring 105 6.3 Property and rented premises 106 6.3.1 Rented premises 106 6.3.2 Private residential properties and commercial properties 107 6.3.3 Business on private residential property 108 6.3.4 Business on commercial property 109 6.3.5 Calculation of depreciation on property 110 6.3.6 Inheritance and gift 113 6.3.7 Condominiums 113 6.3.8 Special industrial sectors 113 6.4 Financial expenses 114 6.5 Other deductible expenses 115 6.5.1 General 115 6.5.2 Damages 115 6.5.3 Bad debt losses 116 6.5.4 Expenses due to crime 116 6.5.5 Other extraordinary expenses 117 6.5.6 Insurance policies 117 6.5.7 Future warranty expenses 118 6.5.8 Membership fees 118 6.5.9 Taxes 119 6.5.10 Newly started businesses 119 6.5.11 Group contributions 120 6.6 Certain expenses that are not deductible 120
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7 Tax Issues Relating to the Annual Accounts 121 7.1 Introduction 121 7.2 Stock 122 7.3 Work in progress (WIP) 125 7.4 Equipment etc. 127 7.4.1 General 127 7.4.2 The general rule (30-rule) 129 7.4.3 The supplementary rule (20-rule) 131 7.4.4 The residual value method 132 7.5 Tax allocation reserve 133 7.6 Compensation funds 134 7.7 Interest distribution 135 7.8 Expansion funds 137 7.9 Copyright owner’s account 140 7.10 Forest account and Forest damage account 141 8 Close companies and their owners 143 8.1 Introduction 143 8.2 Defining a close company 144 8.3 The ‘3:12-regulations’ 145 8.3.1 Why are the 3:12-regulations necessary? 145 8.3.2 Deeming income from a close company as earned or capital income 147 8.3.3 Dividends 148 8.3.4 Taxation of capital gains 151 8.4 Disguised remuneration and disguised dividend 152 9 Business transfers, taxation of groups and restructuring 155 9.1 Introduction 155 9.2 Sale of businesses 156 9.2.1 Sale of the business of a sole trader 156 9.2.2 Sale of partnerships 157 9.2.3 Sale of limited companies 159 9.3 Generation change 162 9.4 Liquidation and bankruptcy 163 9.5 Share exchanges 163
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9.6 Group contributions 165 9.7 Limitations on the deductibility of interest 167 9.8 Participation exemption 168 9.9 Restructuring 169 9.9.1 General 169 9.9.2 Transfer of assets 170 9.9.3 Mergers 172 9.9.4 Dividing a company 172 9.9.5 Intra-group losses 174 9.10 Sweden as an investment country 174 10 Procedure and sanctions 176 10.1 Introduction 176 10.2 Income tax returns and tax decisions 176 10.3 Tax fraud 177 10.4 Reconsideration and appeal 177 10.5 Advance rulings 178 Case index 179 Index 181
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1 Introduction
1.1 General It seems a truism to say that tax law is of great importance for business. From the individual company’s point of view, the amounts paid in taxes are costs that reduce its profit. In a broader perspective, taxation is therefore of importance to the whole business environment. Sweden is a small open economy and an economy, which is in continuous coexistence with the outside world. Non-Swedish speaking people frequently and increasingly come into contact with Swedish tax law; in business as well as through expanding international exchanges with the Swedish universities. However, laws and other legal sources are, in principle, still only available in Swedish. My aim with this book is to help change this, by making Swedish tax law more accessible to those who do not speak Swedish. Modern tax law is very extensive and sometimes extremely complicated. This is the case not least with the national tax laws, which in principle are unique to each state. As a result, even a basic textbook on the subject could easily become very extensive. This book, however, mainly aims to give the reader an orientation. With the help of the book simple questions can be solved immediately. The reader should also be able to recognize
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when there is a need for such detailed research that the use of Swedish-language materials becomes necessary. The book has a fairly concise structure. The first three chapters provide an overview of the Swedish tax system as a whole, including its constitutional prerequisites and sources of law. Chapter 4 addresses the close relation between taxation and accounting in Swedish law. Furthermore, it describes how different corporate forms are treated for tax purposes. Chapters 5 and 6 deal with corporate revenue and costs respectively. In the subsequent three chapters specific issues are addressed, mainly those relating to natural persons who own the companies that they work in, so-called closely held companies, and the taxation of corporate groups. Emphasis is on corporate restructuring and on presenting the rather favourable Swedish tax regime aimed at international investors. Finally, Chapter 10 gives a very brief account of Swedish procedural tax law. Textbooks on law are often structured in the same order as is adopted in the legislation itself. This is only true for part of this book. After the initial outline, I present the tax rules based on the taxpayer’s legal form and situation. It is therefore helpful if the reader has knowledge of basic accounting concepts.
1.2
History of Swedish taxes
Taxes of various kinds have been used to finance the public sector since the Swedish state was established around the 1200s. The predecessors of today’s public sector organizations were less comprehensive and cost relatively little to maintain. The many wars, however, were expensive. The oldest Swedish taxes were mainly taxes on property. In addition, a system of taxation in the form of customs and excise duties emerged gradually. Evidently, these types of taxes are still relevant. The breakthrough of industrialism and capitalism in Europe meant new demands on the tax systems. The modern Swedish
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income tax emerged in the early 1900s, at about the same time as similar systems in other European countries. Important shared characteristics of these systems were the net income as the tax base, the progressive tax rates, and the filing of tax returns as a basis for taxation. A progressive state income tax was introduced in Sweden in 1902, and it was supplemented in 1910 with the wealth tax. A modern proportional local tax came into being with the introduction of the Municipal Tax Act in 1928. The evolution of today’s tax system during the latter part of the 1900s is characterized mainly by two factors. These factors include, firstly, the introduction of VAT, and secondly the increase in the overall tax burden. In line with the expansion of the public sector, taxation came to play a new historical role in the economy during the 20th century. In recent years, globalization, as reflected by increasing technological development and international mobility, has led to an equally increasing pressure on national tax systems. The practical difficulties associated with the taxation of electronic commerce serve as an obvious example. Another example is that states are, to a large extent, using tax cuts as a way to attract business establishments. This so-called tax competition between countries, together with escalating international tax planning, calls in question the future potential of individual states for maintaining a high tax burden. Consequently, a long-term trend seems to be that the importance of taxation as a means of financing welfare is decreasing in favour of individual-based insurance solutions and the like.
1.3
Public revenue and tax policy
The fundamental purpose of taxation is fiscal, i.e. to finance the realization of policy objectives, such as the need for a developed infrastructure, educational system, social security system etc.
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Evidently, it is possible to distinguish between objectives of more or less public character and interest. The political debate on what should be funded by the taxpayer appears to be eternal, and is indeed present in most countries. However, it should be understood that the tradition in Sweden, as well as in the other Nordic countries, shows a strong link between social security and the public sector. The Nordic model has since the 1930s meant that the idea of a strong state is dominant, a state that is focused on meeting the basic needs of its citizens. However, in recent decades this approach has come under strong pressure, not least because of increased mobility and competition. It has largely been replaced by a prevailing market-liberal thinking. As a result, the Nordic countries’ social and fiscal policies have become increasingly similar to their counterparts in other Western countries. This means that the policy considerations, which are generally present in developed countries, currently have the same fundamental importance in Sweden and elsewhere. Some needs that are considered important in a modern society require, to a greater or lesser extent, a common public structure, in order for them to be realized. To most people it would probably seem impractical as well as inappropriate if their country’s armed forces were privatized. However, privatization may appear to be a realistic option for the choice of organizational forms for education. A country’s defence is typically regarded as having such a public nature that it needs public funding, while opinions are divided with regard to schools. Furthermore, it should be noted that the tax system is not only used to finance those activities which from time to time are seen fit for allocation to the public sector. As with other parts of the legal system, tax laws are also used as instruments for executing political power. This exercise of power is commonly referred to as the non-fiscal purpose of taxation. An obvious example of such an intervening tax, aimed at influencing the behaviour of citizens, can be seen in the so-called environmental 18
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taxes. The main objective of these taxes is to influence people and companies to act in an environmentally friendly way. In principle this means, that the more this objective is achieved, the larger the conflict of interest between the tax revenue and nonfiscal purposes. Thus, the reduction of environmental problems may, at least in the short term, be likely to reduce governmental revenue. Moreover, there is a fundamentally different category of intervening taxes, namely those that are introduced entirely for redistributive purposes. This may be the case with income tax rules that specifically target certain groups in society. The most important example of redistributive tax legislation is the use of progressive tax rates. It should be noted that intervening rules with redistributive purposes have decreased in number and importance in Sweden, particularly since the tax reform of 1991. The prevailing tax policy has been, at least in recent decades, that redistribution for efficiency reasons should be placed in the context of the various transfer and benefit systems. This conclusion is based on the conception of tax neutrality as a prerequisite for tax efficiency. In this context, the neutrality principle requires that the tax legislation should not determine the choice of legal form for a business or any other choices of economic significance. In conclusion, the question of what purposes the tax legislation must serve is intimately connected with the question of what objectives the public sector should meet.
1.4
Taxes and other duties
1.4.1 General State and local revenue is largely composed of various contributions made by both natural and legal persons. Swedish constitutional law distinguishes between taxes and other duties.
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Examples of duties other than taxes are those compulsory contributions related to a particular purpose where the payer is entitled to a defined service in return, such as a benefit in exchange for the fee. A tax, however, is often characterized as a forced contribution that is not “earmarked”.1 Taxes accrue to state and municipal assets, without the payer having a right to any particular consideration. Although no sharp demarcation is made in the legal preparatory work, it follows from case law that the mandatory social contributions paid by employers should be regarded as taxes from a constitutional perspective, as is indeed the case with some other tax-related fees. There are, however, exceptions. The tax surcharges that are levied as a consequence of a taxpayer’s incorrect information, or failure to provide mandatory information in his tax return, are considered to be criminal penalties. As a result, the taxpayer is to a large extent protected by the constitution and by the European Convention of Human Rights (ECHR) in this field. 1.4.2
Distinguishing between different types of taxes
Taxes can be divided into a number of categories. The expression direct taxes refers to those taxes that are expected to be borne by the persons who actually pay them. Indirect taxes, however, are designed to be borne by persons other than those who pay the tax. The indirect tax burden is expected to be passed on to someone else, for example a customer who is making a payment as part of a transaction. Income tax is a direct tax and VAT is an indirect tax. The division into direct and indirect taxes is significant in several ways. It is reflected in the design of tax laws, as well as in the organization of tax administrations at both national and European level. Interestingly, the difference between the two tax types is not always correct. Income tax for companies is generally perceived as a direct tax, which is thought to be borne by 1
See prop. 1973:90 pp. 213 (Government bill).
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Robert Påhlsson is professor of tax law at the University of Gothenburg School of Business, Economics and Law.
Business taxation in sweden
The book aims to give the reader an orientation. With the help of the book simple questions can be solved immediately. The reader should also be able to recognize when there is a need for more detailed research that requires the use of Swedish-language materials.
Robert Påhlsson
This book deals with basic Swedish income tax law for sole traders, partnerships and limited companies, with regard to taxable income, deductible expenses and tax issues related to the annual accounts. In addition, separate chapters deal with special fields such as close companies, business transfers, taxation of groups and restructuring.
Robert Påhlsson
Business taxation in sweden
01 02 FnL1 EkZpcm1hIEpvaG4gUGVyc3NvbgRKb2hu AFNsmyg= 02 0040
ISBN 978-91-7678-903-2
Påhlsson_Business_tax_valt.omslag.3.indd 1
5/20/14 12:05 PM