CORPORATE INCOME TAX IN SWEDEN
Sweden’s tax structure is transparent, efficient and designed to meet the needs of international investors. Companies can benefit from advantageous tax rules, favourable structures for holding companies and tax relief for key foreign employees.
The Swedish tax framework for businesses compare quite favourably with other OECD nations. The corporate income tax rate is relatively low compared to other countries and it is only based on the company’s annual profit and no other license tax or local corporate tax is charged.
In addition, there is a beneficial tax climate for companies that set up a subsidiary or branch in Sweden. The tax package includes tax exemptions on capital gains and intragroup dividends, not thin-capitalization regulations, no withholding tax on interest payments and no or low withholding tax on dividends.
Sweden has also entered unilateral tax treaties with more than 80 jurisdictions avoiding double taxation. It is also possible to obtain biding advance tax rulings from The Swedish National Board of Advance Rulings (Sw. Skatterättsnämnden) which allows companies to plan their tax strategy ahead in time.
Finally, in order to attract international talent, it is possible to obtain income tax relief when hiring key foreign employees.
Corporate Income Tax
Swedish entities and foreign companies with permanent establishment in Sweden are liable for Swedish Corporate Income Tax. A Swedish company is generally taxed on it world wide income. Losses generated in a company can be carried forward indefinitely and is offset against future taxable profits. The corporate income tax rate was lowered in 2021 from 21,4% to 20,6 %. Also, it is possible to lower the effective rate, by making deductible annual appropriations to a tax allocation reserve up to 25 % of the profit.
Profit Transfer Opportunities
Each company within a Swedish group of companies constitutes a separate taxable entity. There is no taxation on the consolidated level for a Swedish group of companies. However, the legislation permits the transfer of profits between companies within a wholly owned domestic group, so called Group Contributions, resulting in a effective taxation of the consolidated income.
Group Contributions allow profit transfer between two group companies. The transfer is deductible for the transferring company and taxable for the receiving company. This is applicable if more than 90 percent of the shares in a group company is held during the entire financial year.
Dividends Exempt from Withholding Tax
Dividends distributed by a non-listed resident company to a foreign corporate shareholder are generally exempt from Swedish withholding tax, provided that the recipient is a resident in a country within the European Union and holds at least 10 percent of the shares in the paying company.
In addition, there is no withholding tax on a dividend to a “foreign company” that is the foreign equivalent of a Swedish limited liability company (see definition above) provided that the dividend is tax exempt under Swedish participation exemption rules should the recipient be a Swedish company. Dividends on non-listed shares are therefore normally exempt from Swedish withholding tax.
Swedish tax law does not define equivalent, however some of the legal features of a Swedish limited liability company is that it is an entity with liability limited by shares, a legal entity that can enter into agreements and act before an authority or court and has a board of directors. If there is uncertainty whether a specific foreign company can be regarded as the foreign equivalent of a Swedish limited liability company, the question can be forwarded to the National Board of Advance Rulings.
Regarding listed shares, ownership must represent at least 10 percent of voting rights and shares must have been held for at least one year at the time of the dividend.
Standard withholding tax (if applicable) is 30 percent but is waived or reduced under most tax treaties if no exemption is available under domes¬tic law.
Deduction of Interest Costs
As of 1 January 2019, there are new rules limiting the right to deduction of interests on both internal and external loans in the corporate sector. This limitation is based on an EBITDA (earnings before interest and tax, depreciation and amortization) rule introduced in combination with the reduction of the corporate tax rate to 21,4 percent in 2019.
The EBITDA rule means that the right to deduct the difference that arises when interest expense exceeds interest income (negative net interest) is limited to the equivalent of 30 percent of taxable EBITDA. Negative net interest, which cannot be deducted according to the EBITDA rule, can be carried forward during a maximum period of six years. It is always possible to deduct negative net interest up to a maximum of SEK 5,000,000 without any limitation.
If one company in a company group chooses to use this simplified rule, all companies within the group must use the rule. In addition to this legislation, there are substantial interest deduction restrictions on intra-group loans that need to be considered.
Tax Allocation Reserve for Profit Variations
Companies are allowed to make annual appropriations to a “tax allocation reserve” (periodiseringsfond). The aim of the rules is to offer a mechanism to allow companies to carry back losses to offset previous years’ profits, since Swedish tax legislation does not contain any specific loss carry-back provision.
A company is allowed to make a deduction provided it does not exceed 25 percent of pre-tax profit for the year. Each year’s appropriation creates a separate reserve that must be reversed to taxation within six years of appropriation. Losses may be carried forward indefinitely however some restrictions may apply at changes in the ownership.
