Dividend taxation on gifts from limited companies and tax news at the mid-year

Introduction

In April, the Supreme Administrative Court upheld an appealed preliminary ruling where a shareholder wanted to know if he would be taxed as for a dividend if the general meeting decided to make a donation to one or more public benefit purposes. The Supreme Administrative Court concluded that taxation as for a dividend would occur and, as the owner's shares were qualified, taxation would be according to the 3:12 rules. This week, the Government also presented its spring economic proposal, but concrete tax proposals are conspicuously absent. However, during the spring, the Government has submitted a couple of proposals to Parliament with new tax legislation that will enter into force at mid-year 2023. Below is presented the court case with the donation and the new tax legislation that enters into force on 1 July 2023.

Dividend tax on gifts

According to the rules on value transfers in the Swedish Companies Act, the general meeting of shareholders may decide to make a donation for general charitable purposes as long as the donation is considered reasonable and does not conflict with the fundamental provisions on lawful value transfers in the Companies Act.

When it comes to taxation, the Income Tax Act further stipulates that the person entitled to the dividend when it can be disposed of is the one to be taxed for the dividend. The implication of this regulation is that it is possible for the shareholder, prior to a dividend distribution, to assign the right to the dividend and consequently not be taxed for the dividend paid out.

In the court case, the Supreme Administrative Court had to consider how the provision enabling a gift under the Companies Act relates to the rules on dividends in the Income Tax Act and, inter alia, the possibility for a shareholder to transfer the right to dividends. A private individual was the sole owner of a limited company. The owner intended to have the limited company donate money to one or more charitable organisations. This would be done by having the general meeting of shareholders decide on gifts to the charitable organisations to be benefited.

The Supreme Administrative Court initially concluded that the planned donations to various charities could not be justified by the company's activities. In other words, they were not commercially motivated. The court further concluded that a transfer of assets that is not commercially motivated from a limited company to another entity constitutes such a disposal of the transferred value that it should be treated as a distribution to the shareholders of the transferring company.

The court therefore concluded that even if a gift is made in accordance with the rules of a limited company, this does not prevent the transfer of assets from being treated as a dividend to the shareholders for tax purposes, in accordance with the principles established in case law for other forms of value transfer. It can therefore be stated that the option for a limited company to make a gift for a charitable purpose does not restrict the general principles of taxing shareholders as if it were a dividend on various forms of asset transfers.

The question the court then had to consider was whether the company meeting's decision on a gift could be equated with such a transfer of the right to a dividend, with the consequence that the shareholder would not be taxed as for a dividend after all. Something which the taxpayer argued the company meeting's decision on a gift should be equated with.

In this regard, the Supreme Administrative Court found that the case concerned a direct transfer from the company to the donee and thus could not be equated with a shareholder's assignment of the right to a dividend. The fact that the shareholder could not dispose of the funds transferred through the gifts was irrelevant. The shareholder would therefore be taxed as if for a dividend, applying the 3:12 rules.

Commentary

It is not an unusual situation for a business owner to want to transfer part of their company's assets from their limited company to various forms of public benefit entities such as foundations and non-profit associations. However, this is not a straightforward situation, as the reported court case is a good example of. Against the background that value transfers from a limited company to another entity, according to established case law, should as a starting point be regarded as a dividend to the shareholders, the outcome in the appealed preliminary ruling is therefore not particularly surprising. It is, however, slightly interesting that the possibility that the rules of the Companies Act provide for making donations for public benefit purposes is not matched by any protection from dividend taxation for the shareholders in income taxation. Another question is whether the same approach applies when it concerns a limited company with a larger group of shareholders.

As indicated, there is a possibility for a shareholder to assign their right to dividends and thereby avoid taxation on a later dividend. The Supreme Administrative Court's assessment that a gift decided by the general meeting could not be equated with an assignment by the shareholder of the right to dividends is also not particularly controversial. The conclusion from the Supreme Administrative Court's assessment in this regard is that it is important to follow the formal steps required for an assignment of the right to dividends to have tax legal effect.

Transfers of company assets to various public benefit purposes and charities are a complex area presenting several challenging questions. Therefore, it is important to carefully analyse the situation so that the planned transactions do not result in any unintended tax consequences. Please feel free to contact one of Moore's tax lawyers for further guidance.

New tax legislation from mid-year

There were no sharp tax proposals in the economic spring budget submitted by the Government to the Riksdag at the beginning of the week, which is naturally explained by the government's primary task right now being to get a handle on high inflation. However, there are some previously presented tax proposals, and for which the government has submitted propositions with legislative proposals to the Riksdag during the spring. Legislative proposals that will come into effect at the half-year mark.

Tax-free charging at the workplace

The government has proceeded with the proposal in a bill that employers should be able to offer a tax-free benefit of charging at the workplace for their own car or for a company car. The intention is for the new rules to come into effect on 1 July 2023 and apply up to and including 30 June 2026.

Enhanced reduction of employer contributions for R&D work

Companies working with research and development currently have the opportunity to receive a reduction in employer contributions for their employees. The cap for this deduction from employer contributions is currently SEK 600,000 per month. The government has proposed in its bill to increase the cap for the deduction to SEK 1.5 million per month, effective from 1 July 2023. The proposal does not mean any reduction in the employer contribution reduction for each employee, but it means that more employees can be covered. The increased cap means that companies with payrolls for employees working with research and development up to approximately SEK 180 million can fully receive the statutory reduction.

The plastic bag tax

Regarding the widely discussed plastic bag tax, it can be stated that the government is not currently submitting any proposal to abolish this tax. However, the government intends to, before the budget proposal for 2024, remit a proposal to abolish or significantly reduce the tax on plastic carrier bags.