Tax planning for Swedish residents

Sweden is one of the places with the highest taxes in the world!

If you earn wage here, the top tax bracket is taxed at 58 %, plus there are social contributions for the employer (around 31%) and there are pension contributions (7%).

Having those percentages in mind, it’s clear that you have to give up a lot of what you’re making. If you are a business person, who is also a resident in Sweden it’s clear why would you want to reduce your taxes.

What can be done in this situation?

Well, we’ll go through three main parts you’ll want to pay attention to:

-Corporate residency

-The source of income

-Controlled Foreign Company rules (CFC)

Any company that is registered in Sweden will be considered a Swedish company. Where they expand this is when we talk about income basis. They have a broad definition of permanent establishments, so if your royalties are being paid out to you it can be considered as permanent establishment and you can be taxed based on that.

If you have a company that is registered in Sweden you are going to be subject to their taxation.

The basic Swedish company will pay tax rate of about 22%, which is not too bad but if you decide to take that income personally that will result in much higher taxes.

Investment income which includes dividends is taxed at 30%

If two forms of taxation are stacked together (corporate tax plus distributions) it becomes very very unfavorable for you.

What you’ll have to pay the most attention to is CFC rules.

When we do tax planning for anyone coming from the high taxes country, the first thing we do is forming a company abroad. We form a company in an environment where it will be subject to a way less tax. After that, we will either try to take the dividends and bring them back to the original country if dividends are taxed at a favorable rate OR we are going to keep the money in the foreign company and take the advantage of better tax rates.

Forming a company abroad is not enough. We also want actual financial activities to happen through that company. Your ideal situation is to not have a permanent establishment in Sweden.

Where we could run into a problem would be CFC rules.

Sweden has always had a very organized system with the rules they knew how to implement.

The threshold for being CFC is typically 25%.

If you have over 20% either in voting rights or in terms of distribution rights directly or indirectly your foreign company can be subject to CFC rules.

However, Sweden has a lot of exemptions from that.

These rules only apply if it’s low tax income. Low tax income is when it’s less than 55% of Swedish income tax, which would approximately be 11%.

If you’re taxed below 11% abroad, you will run into trouble.

Sweden also has a whitelist. This list is very broad (152 countries) and it includes EEA countries. You will have to be careful about this because it doesn’t apply to all income. For example, royalties from certain countries wouldn’t apply, Maltese favorable tax rates might not apply, etc. You will need to go through this list and see whether it applies to your situation.

In an ideal situation, you will want to take advantage of the participation exemption.

If you need to have actual activity in Sweden, we recommend you to have a separate company for that so there is an arms-length distance. Your profit center will be abroad, while your cost center will be in Sweden. You will have local employees and expenses in Sweden without too many gains. Your profits will be accumulated somewhere else.

 

Different types of income are taxed differently in Sweden. Those classifications are very detailed and you will need to know which taxation applies to your situation. Investment income has different rules than non-investment income, this is something to pay attention to.

As you probably figured by now, the Swedish tax system is very complicated and detailed. There are lots of rules and also lots of exemptions.

If you are a resident in Sweden and want to reduce your taxes reach out to us, explain to us your situation and we will come up with the plan that will work best for your business.