Establishment of a foreign trust or an international holding company. A tax study of two alternative ways to reconstruct a Swedish close company.
Abstract: To achieve a kind of neutrality between insid-ers of close companies and other taxpayers in Swedish society the Swedish tax law states that capital gains, which derive from ownership in close companies, and dividends distributed to owners of close companies will be subject to high taxation. However, changes in owner-ship may involve a tax reduction. The estab-lishment of a foreign business can be carried out in a number of ways, for example, investments may be transferred to a foreign trust or an international holding company in a suitable country. Every solution involves tax consequences which must be taken into considera-tion. The establish-ment of a foreign trust may, in certain circumstances, result in the avoid-ance of tax or at least deferral of tax. However, there are difficulties in relation to the taxation of trusts, which depend on the distinct legal and taxation systems of common law and civil law countries. Civil law countries do not recognise a separation of legal and equitable ownership of property, which a trust requires. When establishing a trust, the settlor gives the legal interest to the trustee and the equitable interest to the beneficiaries. The trust is in addition not a legal entity. These differences of property law create difficulties in the applica-tion of the Swedish tax law. The setting up of a foreign trust is associated with uncertainty concerning the Swedish tax claims, the reason being that the question of ownership is hard to determine. It is important that the settled property is irrevocably sepa-rated from the settlor's property, otherwise the settlor may be treated as if he or she still is the owner of the trust property. A trust is not a legal entity, which means that it is not possible to treat the trust as an object liable to pay tax. This means for example that the trust is not liable to pay tax on dividends distrib-uted from the Swedish company nor is the trust subject to the Swedish CFC-legisla-tion. In accordance with the common-law, the trustee is the official, legal owner of the trust. However, the trustee will not obtain any economic gain from the property and should therefore not be taxed as its owner. The main principle in taxation is that the one who benefits from the property, is the one who will be subject to taxation. The real problem arises in respect of discre-tionary trusts, in which there is no interest in possession. The conse-quence will be that where a beneficiary is not absolutely entitled to the income, the income will not be sub-ject to Swedish tax until it is distributed to a resident taxpayer. The establish-ment of a foreign trust may trigger Swedish gift tax&semic however, when dealing with discretionary trusts, the same problem that affects income tax applies. The reason being the difficulty in determining the owner of the trust property. The establishment of a discretion-ary trust possesses other characteristics, for example that the assets are not aggregated with either the estate of the settlor or the beneficiary. Tax-payers can in other words defer domestic tax by accumulating income in a for-eign trust. However, to repatriate the income without taxation the benefi-ciaries have to move to a country which does not tax distributions. Another way to reconstruct a Swedish close company is to transfer the owner-ship to a Danish holding company. Denmark may be said to have improved its attractiveness as an international holding company location by the inauguration of some favourable rules. Denmark will for example be unique, since both inbound and outbound divi-dends will be exempt from taxation. This will enable multinational companies, which have their residents in countries out-side EU, to obtain substantial tax savings by repatriating profits from Europe through a Danish-based holding company. Another advantage of establishing a holding company in Denmark is that capital gains are free from tax after three years of holding. One possibility is to transfer the ownership of the Swedish close company to a Danish holding company. This transaction will however trigger Swedish capital gains taxation, and it is therefore not an attractive option. However, there are, under certain conditions, possibilities to transfer the business of the close company at book value to a Swedish subsi-diary of a Danish holding company. In accordance with Danish rules of taxation, an owner will get the market value of the shares of the Danish holding company as the acquisition value, when he or she immigrates to Denmark. The result is that only gains which will arise in the future are subject to Danish tax. The share-holder has to move to Denmark and cut the essential connections to Sweden to avoid the Swedish taxation applicable to owners of close compa-nies. The old Swedish company has therefore to be liquidated and the subsi-diary of the Danish holding company has to be sold. However, to be able to obtain the capital gains tax-free, the Danish holding com-pany can first sell the shares of the Swedish subsidiary after three years of hold-ing. Consequently the establishment of a foreign trust or a Danish holding company may, under certain conditions, result in that the Swedish taxation concerning close companies will not be applicable. The constructions may be favour-able if there is a wish to accumulate profits for the future. However, to be able to repatriate profits without burdensome taxation, the shareholders or the bene-ficiaries have to immigrate to a country which does not tax distributions.
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