Background
In November 2016, the Inquiry into the Review of the 3:12 Rules submitted its final report. The proposal included, among other things, an increase in the tax on dividends and capital gains to 25 per cent. The limit amount according to the simplified rule would be lowered and disqualify from the limit amount in other companies. The major changes proposed concerned the calculation of salary-based allowance and a significant tightening of the salary withdrawal requirement. At the same time, proposals were submitted for a solution to the generational transfer problem in closely held companies. We wrote about the report in. .
The referral bodies that have expressed an opinion on the proposal have in many respects been critical of it. The government has now submitted a memorandum with a draft referral to the Council of Legislation, in which the proposals have been reworked in many respects.
Threshold amounts under the simplification rule
According to the simplification rule, the annual limit amount can be calculated at 2.75 income base amounts. The government's proposal means that the lump sum amount according to the simplification rule will remain at the same level. This goes against the inquiry, which proposed a reduction to 1.75 income base amounts.
However, the investigation's proposal that anyone calculating a limit amount under the simplified rule in one company should not be able to calculate a limit amount in any further companies is being pursued. The reasoning is that the simplified rule was introduced for companies with small capital and few employees.
The purpose of this restriction, according to the government, is to prevent the possibility of co-owners who apply the main rule in a company from being able to form a new company for capital management and withdraw part of the profit by applying the simplification rule.
Threshold amount according to the main rule
The principle for calculating the limit amount according to the main rule remains the same as today. This means that the calculation is based on the cost basis of the shares multiplied by the government bond rate plus nine percentage points. The option to use an increased cost basis for shares acquired before 1990 or a capital base for shares acquired before 1992 will also remain.
A salary-based allowance is added to this calculation. In the calculation of the salary-based allowance, a number of adjustments are proposed in relation to the investigation's proposal.
Pay-based space
In the draft bill for the Council of State, the government proposes that the salary-based allowance be calculated on the basis of three levels:
– 15 percent of the shareholder's salary base that does not exceed 6 income base amounts,
– 30 per cent of the shareholder's salary base exceeding 6 income base amounts but not 60 income base amounts, and
– 40 per cent of the shareholder's salary base exceeding 60 income base amounts.
The inquiry's proposal was also a calculation based on a three-step ladder but with different levels.
As the investigation suggests, the government proposes that the salary-based allowance be individualised by basing the calculation in the three steps on the owner's share of the salary base. Within a circle of related parties, the salary-based allowance shall be calculated jointly and then distributed among the related parties in proportion to their shares in the company.
Example:
A private company is owned by A 50 %, B 40 %, and C 10 %.
B and C are related.
The payroll base amounts to SEK 20 million.
The income-related base amount is 61,500 SEK
A's share of the payroll base is 50 %, which is 10 million SEK. With an income base amount of 61,500 SEK, the payroll-based allowance becomes 3,575,650 SEK.
15 % of 369,000 kr (6 ibb) 55,350 kr
30 % of 3,321,000 kr (60 – 6 bids) 996,300 kr
40 % out of 6,310,000 kr (over 60 ibb) 2,524,000 kr
3,575,650 kr
B and C's share of the payroll base is the remaining SEK 10 million. The payroll-based allowance of SEK 3,575,650 is distributed between B and C according to ownership share, so that SEK 2,860,520 is allocated to B and SEK 715,130 is allocated to C.
If B and C are not related, the payroll base of £8,000,000 (40 %) applies to B and £2,000,000 (10 %) to C.
B's pay-based allowance becomes:
15 % of 369,000 kr (6 ibb) 55,350 kr
30 % of 3,321,000 kr (60 – 6 bids) 996,300 kr
40 % av 4,310,000 kr 1,724,000 kr
2,775,650 kr
C's salary-based space becomes:
15 % of 369,000 kr (6 ibb) 55,350 kr
30 % of 1,631,000 kr (60 – 6 ibb) 489,300 kr
£544.65
Unchanged withdrawal requirements
The government proposes that the salary withdrawal requirement to utilise the salary-based space remains at today's levels. That is, six income-based amounts plus five percent of the total cash compensation in the company and its subsidiaries, or 9.6 income-based amounts.
The investigation proposed an increase in the salary withdrawal requirement and that this should also be individualised based on the owned share. A large number of referral bodies were critical of the investigation's proposal and considered the increase in the salary withdrawal requirement to be too high. It was particularly highlighted that the proposal hit hard against co-owners in smaller companies and start-ups, as well as against co-owners in companies outside the metropolitan areas.
The capital share claim is converted into a ceiling
Like the investigation, the government proposes that the requirement for a co-owner to own at least four percent of the company's capital in order to calculate a salary-based allowance be removed.
Instead, the government proposes that the salary-based allowance be limited for co-owners who own less than four percent of the capital. The limitation means that their salary-based allowance may not exceed 25 percent of their own or any related person's cash remuneration from the company and its subsidiaries during the year prior to the tax year.
The general cap on a salary-based space of no more than 50 times one's own or a related person's cash remuneration is abolished.
The specific subsidiary definition is retained
In connection with the introduction of the four per cent capital adequacy requirement in 2014, a definition of subsidiary was also included in Chapter 57. income tax act (1999:1229), IL. As the government proposes continued special treatment for those owning less than four percent, there are reasons to retain this definition. The rule that a parent company must own more than 50 percent of the capital in a subsidiary for its employees' salaries to be taken into account will therefore remain. The inquiry proposed the abolition of this rule and a return to the general definition of subsidiary in the Companies Act (2005:551), ABL.
This means that the requirement for a partnership to be wholly owned within a group in order to be able to include salaries in the partnership also remains.
Lower enumeration of saved dividend headroom
The government considers, contrary to the investigation's view, that there are reasons to limit the carry-forward of saved dividend allowances. Therefore, it is proposed that the carry-forward be reduced from the government bond rate plus three percentage points to the government bond rate plus two percentage points.
Tax amounts for dividends and capital gains
The Government is of the opinion, as is the inquiry, that a common ceiling amount for capital gains and dividends taxed as earned income should be introduced. This means that dividends and capital gains, respectively, shall not be recognised in the earned income category to the extent that it would result in the taxpayer and related persons having recognised dividends and capital gains from a company in the earned income category during the tax year to an amount exceeding the equivalent of 120 income base amounts.
The inquiry proposed a common ceiling amount of 100 income-based units.
In the case of additional purchase price, it is proposed that the portion of capital gains or dividends that has been taxed in employment in previous years should be taken into account when calculating the ceiling amount. This is in accordance with the inquiry's proposal.
Tax rate of 25 percent within the threshold amount
As the investigation suggests, the government proposes that dividends and capital gains up to an amount corresponding to the threshold amount shall be taxed at 25 percent, instead of the current 20 percent.
However, the government proposes that the tax rate remains at 30 per cent for dividends and capital gains above the ceiling amount. The inquiry, however, proposed a reduction to 25 per cent.
Capital losses on qualifying holdings in Swedish limited companies and foreign legal entities that are not listed on the market shall be deducted to five-sixths against taxable capital gains on such assets.
Unchanged proposal for generational change
In the part of the proposal concerning generational changes in small and medium-sized enterprises, the government is proceeding with the investigation's proposals without amendments.
This means that an exemption is being introduced into the rules regarding the same or similar business activities. The exemption is to be applied in cases of ownership changes between related parties. The conditions are that:
1. the shareholder's company, directly or indirectly, has transferred shares in a closely held company or partnership, a business or branch of activity,
2. the shareholder or their spouse has not, directly or indirectly, owned shares in the operating company during the tax year,
3. the shareholder or another related party, other than an active related party, has been significantly involved in the operating company, or in another closely held company or closely held trading company that has carried on the same or similar business as the operating company, for at least five of the seven tax years immediately preceding the tax year in which the transfer occurs, and
4. that there are no special reasons for the share nevertheless to be considered qualified.
Entry into force
The rules are proposed to enter into force on 1 January 2018.
The new provisions related to ownership changes between related parties apply for the first time to shares transferred after 31 December 2017. The other new provisions apply for the first time to tax years commencing after 31 December 2017.
If the taxpayer or an associate disposed of a share before the Act came into force, they may request that the new rules on the cap amount apply, provided that the disposal took place during any of the five preceding tax years. This option shall apply until 31 December 2022 and may not cover internal share transfers.
Commentary
The government's proposal entails both improvements and tightening compared to the inquiry's proposal. The most positive aspect is that the simplification rule remains unchanged at 2.75 income-based amounts and that the salary withdrawal requirement is not tightened to the extent suggested by the inquiry. At the same time, the government is removing some of the positive proposals left by the inquiry, for example, the reduction of the tax rate on dividends and capital gains above the ceiling amount, the individualisation of the salary withdrawal requirement, and the abolition of special treatment for those owning less than four percent and the definition of a subsidiary. Furthermore, the ceiling amount for service taxation is raised compared to the inquiry's proposal.
Some of the adjustments made are justified by the government on the grounds that the inquiry's proposals heavily impacted the very smallest companies. Retaining the level of the simplification rule and a better wage-based allowance for salaries up to 60 income base amounts benefits smaller companies in relation to the inquiry's proposals. At the same time, the wage-based allowance for companies with salaries exceeding 60 income base amounts deteriorates, as the allowance is limited to 40 per cent, compared to the inquiry's proposal of 50 per cent.
What happens now?
This memorandum is referred to as a draft submission to the Council on Legislation. The proposal has been re-sent to the referral bodies, which have until 27 April to submit their comments. Thereafter, the government can proceed with a submission to the Council on Legislation and a subsequent bill. It remains to be seen whether the proposal will be submitted as a separate bill or as part of the autumn budget bill.
Source: Wolters Kluwer – Tax Information
