Property packaging
By packaging assets into a subsidiary and selling the subsidiary, instead of selling the assets directly to a buyer, you avoid capital gains tax. Packaging is possible for all types of assets, but is more significant for assets with long depreciation periods. Real estate belongs to the category of assets with the longest depreciation period, and therefore real estate packaging is more important than packaging other types of assets.
In the summer of 2015, an investigation was initiated to review issues concerning property packaging and stamp duty. The investigation, which was tasked with, among other things, proposing new rules to counteract property packaging as a tax planning tool, has now submitted its report.
Rules to counteract package transactions
The inquiry outlines six alternative ways to counteract the tax advantages that arise from the transfer of packaged properties, concluding that the write-down model is the most suitable. The principle is that when there is a change of ownership in a company, an effect occurs that impacts the taxation within the company, in a similar way to when the controlling influence in a loss-making company transfers to a new owner.
Main rule on depreciation/derecognition
According to the proposal, a tax charge shall arise when a Swedish or foreign company disposes of business-related shares, or corresponding shares that are tax-exempt upon disposal, and the assets in the company principally consist of properties located in Sweden.
When assessing whether the assets primarily consist of real property, the market value of the properties owned by the divested companies shall be compared with the consideration for the shares. To reduce the risk of companies attempting to temporarily increase their assets in order to fall below the threshold for de-taxation, liquid assets shall not affect the amount of consideration.
The deemed disposal means that the company owning the properties will be considered to have disposed of and reacquired the properties for a price corresponding to their market value. The deemed disposal includes building fixtures and land improvements. The disposal means that any depreciation deductions made must be reversed and a capital gains calculation must be carried out. The profit is taxed in full, i.e. without apportionment. The deemed market value of the property can be used as the new acquisition cost and serve as the basis for new depreciation deductions. The market value, which is the price the company would have received if the properties were sold directly, may, but does not have to, match the price the buyer pays for the shares in the company.
A corresponding rule on amortisation already exists in Chapter 25a, Section 25 of the Income Tax Act (1999:1229), IL, for closely held companies that dispose of subsidiaries where there is a property primarily used as a residence for the owner or their relatives.
Exceptions to the main rule on write-downs
If the disposal of shares is to be taxed according to the rules on shell company taxation, no deemed disposal shall take place. A deemed disposal shall also not take place if the shares are considered to have been disposed of due to liquidation or bankruptcy. A further exception from deemed disposal applies if the shares sold are listed on a market.
A deemed sale shall also not take place if the share of ownership has been disposed of in order to sell a business whose main income and expenses are not attributable to a property.
If the controlling influence over the divested company does not cease, capital gains tax on properties in the divested company shall only be levied if there are special circumstances. Such circumstances never exist in transfers between companies within the same group.
The property fence is abolished
In connection with capital gains on shares in companies that qualify as business holdings becoming tax-free, a property trap was introduced. This means that a company's loss on the disposal of property can only be offset against gains on property. The aim was to counteract the disposal of properties in packaged form when the disposal results in a capital gain, and directly to the buyer when the sale results in a capital loss.
With the introduction of rules on the taxation of capital gains on the disposal of packaged properties, the property loophole may be abolished.
Form-based duty instead of stamp duty
The underlying principle behind the proposal for de-taxation is that the tax burden on a transaction involving a packaged property should, as far as possible, correspond to the tax burden on a direct sale of the property. Since it is shares that are sold and not the property itself, it is not appropriate to levy stamp duty. Instead, the company subject to de-taxation should also recognise a notional income equivalent to the stamp duty that would have been payable on a direct sale of the property.
The notional income shall accordingly be calculated at 7.09 per cent of the higher of the property's market value and the taxable value in the year prior to the tax reduction.
At the level of presumptive taxation, the proposed reduction in the stamp duty for legal entities from 4.25 per cent to 2 per cent has been taken into account.
Warehouse properties are being phased out in the corporate sector
Developments in practice mean that within a group of companies, it is possible to choose whether a warehouse property is sold packaged or not. As the classification of properties as inventory or capital assets is largely optional within the corporate sector, the inquiry proposes that it be abolished. The proposal means that all properties within the corporate sector should be treated as capital assets. However, the tax treatment of properties in sole proprietorships will not be affected.
So that VAT management is not affected, a consequential amendment is proposed where the VAT rules are linked to accounting instead of IL.
Continuity in bargain sales
To resolve an unintended effect concerning below-market transfers of a building with land, the inquiry proposes that tax continuity should apply with respect to the acquisition cost and previous depreciation allowances. This means that the acquirer steps into the transferor's tax situation, and the building and land will continue to have the same acquisition cost, tax value, and depreciation allowances with the acquirer as with the transferor.
Building inventories belonging to the property shall not be covered by the proposed continuity. Such assets shall receive a new acquisition value at the recipient.
Extended stamp duty liability
Acquisition through property regulation or other property formation measures is not subject to stamp duty. To counteract stamp duty evasion through various property formation measures, an extended obligation for stamp duty is proposed.
Stamp duty shall therefore also be payable on the acquisition of real property through property adjustment or through division into plots by partition, if the acquisition is made for consideration. Stamp duty shall in these cases be reduced by the fee paid for the property adjustment measure.
Limitation of Stamp Duty
One consequence of the proposal on tax exemption and notional income is that the tax cost of real estate transactions will increase. The inquiry therefore proposes that the stamp duty for legal entities be lowered from 4.25 per cent to 2 per cent.
To prevent the transfer of properties within a group from being counteracted by stamp duty, there is currently a possibility to defer payment. The investigation proposes that for intra-group acquisitions that could lead to deferral of stamp duty, no stamp duty should be payable.
Entry into force
The changes are proposed to enter into force on 1 July 2018 and apply to disposals of shares after commencement.
For properties that change character from inventory asset to capital asset upon coming into force, the property's acquisition value as a capital asset shall be considered to be the tax value the property had as an inventory asset.
Source: Wolters Kluwer – Tax Information
