Swedish Corporate Tax Planning Advantages

Swedish corporate tax planning has developed in recent years; tax planning advantages has emerged with new reforms in Sweden.

The dual Swedish tax system contains a progressive tax earned on income by person and a proportional tax on capital income, in difference to many other countries. In most other countries all income from various sources are aggregated and taxed at the same tax rates. The Swedish dual system may allow larger differences in the taxation of capital income and personal earnings of high earning individuals. Basically the owner of a company can adjust his own personal income and the amount he would like to be paid to him in dividends (converted to capital income).

High earning individuals can register a company just to transform the normal personal earnings to company revenues. The § 3:12 rule in Swedish law is to prevent active owners of closely held companies of doing just that. Dividends up to a threshold amount taxed as capital by 20 percent tax, while dividends above that amount is taxed as earned income, with a maximum tax rate of just under 57 percent.

The § 3:12 rules were changed in 2006 so that they became much more favorable for company owners. The government aimed at stimulating entrepreneurship and employment in family businesses. The tax rate for dividends over the limit was lowered, and simultaneously the threshold base of calculation was raised significantly.

In addition, possibilities to use a simplification rule was added that specifies a company’s financial limits independent of its capital, activity and labor costs, as a large amount of the active owners choose to do.

After the changes in 2006, the applied rules gradually have become more generous by further increases of the threshold. Meanwhile, the minimum requirement of capital to incorporate companies have been reduced to the low amount of SEK 50 000, the audit requirement abolished for certain types of businesses, and other tax rules simplified, which made it much more attractive for people to incorporate companies and convert personal earned income to capital income.

A sole owner of a small company with SEK 50 000 in share capital may, with today’s tax regulations, almost get three times the share capital as threshold amount per year with the simplification rule, which he or she can pay out as low taxed dividends instead of high taxed income. Unused threshold amount from earlier years may also be saved and used for the years to come.

Swedish Corporate Tax Advantages

When comparing the tax liability on wages, dividends active owners of closely held companies, it is important to take into account taxes paid on both the individual level (personal income tax and taxes on dividends) and on company level (social contributions and corporation tax). The actual difference in tax liability between the maximum tax rate for dividends under the limit, and the wages is just over 25 percentage points for active owners of closely held companies.

Data has been analyzed in Sweden on individual and company level for the period of 7 years. The results show that between the years 2002-2009 many have been using the Swedish corporate tax advantages. The analysis provides clear facts of a widespread income transformation from personal earned income to capital income after the change of rule in 2006:

– Since year 2006 the active shareholders in private companies have significantly increased. Before the reform, about 45 percent of companies owned by few people had an active ownership of at least 50 percent. This proportion increased to over 70 percent in the years after the reform. The trend towards active ownership in close held companies is a clear indication of incomes being converted. Passive ownership is transformed to active, workers form their own consulting firms, private companies are changing organization, and individuals form holding companies for future benefit of the saved threshold amounts.

– Many companies are incorporated with the sole purpose of allowing owners to convert income by exploiting existing tax rules. In the year of 2006, about one-third of all newly formed private companies were holding companies, shell companies or companies with low turnover. It has especially been high income individuals who have been incorporating holding companies and shell companies after the reform.

– A large number of small companies that did not previously pay out dividends to shareholders began to pay dividends after the reform.

– A clear pattern of higher dividends and lower wages among active company owners with higher incomes. This tax strategy effectively reduces their overall tax liability. Dividends from closely held companies have increased by over 80 percent compared to the average before the reform, while dividends from other companies (with a wide circle of owners) have decreased. The high dividends from few owners companies have remained at a higher level after the reform despite the economic crises that arose in 2008.

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