On 27 October 2016, the government announced in a report to Parliament that it considered there to be specific reasons to stop tax planning where property is transferred to legal entities, often before an external disposal. New provisions, where the properties will be considered to have been disposed of, are proposed to apply to transfers from the day after the notification, i.e. from 28 October 2016. The proposal has now been formalised in a memorandum from the Ministry of Finance, which states that packaging through under-market-value transfers at tax values is still possible.
Packaging
It is common for more expensive assets, such as properties, to be packaged into existing or newly formed subsidiaries before a sale, rather than selling the property directly to the buyer. The profit arising from the sale of shares in the subsidiary is tax-exempt according to the rules governing business equity investments.
A physical person normally packages a property by gifting it to the company at a value just below its tax assessment value. However, the company pays stamp duty on the transfer. A legal person can package assets through a transfer at an undervaluation to a subsidiary at a tax-assessed value in order to subsequently sell the subsidiary at market value.
In a letter of cessation filed on October 27th, the government announced a change in the rules to address what they consider to be a significant loss of tax revenue.
The proposed stop rules
According to the proposed new rules, a property shall be considered divested if it is transferred to a legal entity or a Swedish partnership in exchange for consideration exceeding a certain value. This value shall be the property's tax value if it is a commercial property and its cost basis if the property is a private residential property.
Partnerships are legal entities, but according to Chapter 2, Section 3 of the Income Tax Act (1999:1229), the provisions concerning legal entities shall not apply to partnerships. This is why partnerships are explicitly mentioned in the proposal for the new statutory text. Transfers to foreign equivalents of Swedish legal entities, including foreign entities subject to partner taxation, shall also be covered by the proposal.
The proposal covers transfers of real estate by both natural and legal persons to other legal persons.
Entry into force
The amendments are proposed to enter into force on 1 August 2017 and apply to property transfers occurring after 27 October 2016.
Commentary
The proposal means that if a property is transferred for consideration that is less than or equal to the tax value of a trading property or the cost basis of a private residential property, it may still be considered a gift for tax purposes if the general requirements for a gift are met. Thus, it is a gift if there is a voluntary
transfer of wealth from the donor to the recipient, and the donor has donative intent. The gift element is considered sufficient when a relative or other party owns at least 40 percent of the company's shares. Previously, the transfer would also have to be made at a value below the assessed value.
Transfers at a below-market price to a company at book value are not affected by the proposal. The rules are designed to primarily affect transfers of real estate, including inventory properties, by individuals to their own companies in anticipation of an external sale.
The new rules prevent certain packaging of real estate into legal entities. However, packaging may be done with assets other than real estate. In a granted advance ruling from 2013, the Supreme Administrative Court stated that a company's ongoing work could be packaged into subsidiaries, which could then be sold as business-related shares.
Source: Wolters Kluwer – Tax Information
