Tax Facts - Sweden

Gerard Associates Ltd. Financial Advisory Services does not provide individual tax advice, and nothing contained in this briefing should be construed as such. We make every effort to ensure the accuracy of the information but cannot be held responsible for any liability arising.

It is essential that all clients seek tax advice specific to their own personal circumstances with the relevant tax professional of the jurisdiction(s) in which you are liable to tax.

This has been prepared based on our understanding of current legislation and tax practice as at the date above. However, these are subject to change, and may result in income tax consequences different from those detailed below.

We cannot accept responsibility for its interpretation or any future changes to law.

Introduction

Taxation in Sweden occurs at both a national and a municipal level. The Ministry of Finance is responsible for tax legislation and the regime is administered by the Swedish Tax Administration.

Tax Year

1st January – 31st December

Assessment Basis

Swedish residents are taxed on their worldwide income. Married persons are independently liable. A tax returns must be filed annually. Each person receives a pre-printed form that can be amended by the individual. Filing of a tax return may also be completed via internet, e-mail, telephone or SMS, as long as that individual does not have complicated tax affairs.

Income Tax

Swedish residents are liable to tax on their worldwide earned income, which will include all income from employment, (whether salary or benefits in kind), together with, for example, directors fees, bonuses, commissions, pensions and annuities plus any other type of allowance.

Various general deductions for expenses may subsequently be deducted and these include travelling

expenses to and from work, cost of living allowances in respect of business trips and pension premiums. Although in many cases the deductible amounts are restricted or regulated.

Taxable income is also reduced by the Basic Income Tax Deduction (Personal Allowance) this varies

between SEK 11,900 & SEK31,100 for 2007. The Basic Income Tax Deduction depends upon the total

size of the individual’s taxable income and municipal tax rate, and varies between SEK11,900 and 31,100 (2007). Individuals pay two types of tax on their taxable income, namely national income tax and municipal income tax. Taxable income less than SEK316,700 is subject to municipal tax only. The municipal income tax depends upon the municipality in which the individual is resident, ranging from 30% to 35%. The average rate of municipal tax is 31% and an extra SEK200 is due on income less than SEK306,000 in respect of municipal tax. Taxable income in excess of SEK316,700 is also subject to national income tax calculated at a flat rate of 20%. The national income tax rate on taxable income exceeding SEK476,800 is 25%, i.e. the marginal tax being 56% if the municipal tax applicable is 31%.

Taxation of Investment Income

Investment income, or capital income as it is termed in Sweden, is not subject to a municipal tax but is liable to flat rate tax of 30% with few allowances or deductions. Capital income includes interest income, dividends received, as well as capital gains arising from the sale of shares and property, for example.

Tax on Property Rental Income

Worldwide rental income from the letting of private property normally forms part of capital income. The tax is assessed based upon annual rental and other income received from the property after a deduction of related expenses. For private real property, the related expenses are deemed to be a standard amount of SEK4,000 and 20% of the annual rental income. For rented flats the actual costs are deductible instead of the standard amount.

Wealth Taxes

Sweden abolished all wealth taxes with effect from 01 January 2007.

Capital Gains Tax

Capital gains form part of capital income and are taxed accordingly. This includes the sale of shares, property and other assets. Profits on gains from the sale of personal assets are only taxable if profits exceed SEK50,000 per annum. Capital losses as well as interest paid in respect of loans are deductible from capital gains and income. If there is a net loss or deficit a tax credit of 30% of the deficit is granted against employment income or real estate tax. Any deficit in excess of SEK100,000 will, though, only receive a credit of 21%. Deficits may not be carried forward to subsequent tax years. As a rule only 70% of capital losses from the sale of securities and only 50% of the capital losses from the sale of private real property are deductible. For quoted shares 100% of a loss may be deducted against gains on such quoted shares.

Inheritance and Gift Tax

Inheritance and gift tax were abolished for both private individuals and companies on 1 January 2005.

Regional and Municipal Taxes

See income tax

Property Taxes

Property or real estate tax is levied on all real estate including foreign owned property (for Swedish residents). The tax rate for 2006 is 1% of the tax assessed value of the real estate. This is set at a level corresponding to 75% of the real estate's market value.

Stamp Duty/Transfer Tax

Stamp duty is levied on real estate and site leasehold rights (1.5% for individuals) and grant or suspension of mortgages (2%).

Sales Tax

A sales tax (VAT) of 25% is generally levied with some goods being exempt and others having lower rates of 12% and 6%.

Social Security Contributions

A wide ranging, compulsory social security system exists in Sweden, which provides benefits such as basic and complimentary pensions as well as social welfare benefits these include sickness pay and maternity allowance. Social security contributions are paid partly by the employer and partly by the employee. An employer's compulsory contribution is 32.42 % (for 2007) of monthly gross remuneration (including both salary and benefits). There is a reduction for employees between the ages of 18-25 and over 65. An employer may also enter into a collective agreement to pay employees additional pension premiums of between 6% and 15%.

An employee is liable to pay a compulsory contribution, or Basic Pension Contribution, of 7% (2007) of annual taxable income. However, no contributions are paid on taxable income in excess of SEK370,400, which makes a maximum employee pension fee of SEK29,900 for 2007. 100% of the employee’s contribution is entitled to a tax reduction.

Taxation of Expatriates Living in Sweden

The basis for taxation in Sweden is determined by an individual’s residence status. Swedish residents are taxed on their worldwide income and non-residents only on income arising from sources in Sweden. Expatriates are considered resident in Sweden as long as they meet the following conditions:

• They are domiciled in Sweden, i.e. have a permanent home in Sweden or;
• They stay permanently in Sweden, i.e. stay continuously for more than six months in the country or;
• They are considered to have an essential connection with Sweden after leaving the country/moving abroad

When determining whether an individual has an essential connection with Sweden, all important ties with Sweden, both economic and social, are taken into consideration by the tax authorities.

Individuals who are Swedish nationals or foreign nationals who have been resident in Sweden for a total of ten years are deemed to be resident in Sweden until five years have passed from the date of moving out of Sweden, unless the person can prove that their essential connections with Sweden have been broken. After five years the burden of proof is reversed and the tax authorities have to prove that essential ties still exist between the individual and Sweden.

An individual who is considered resident in Sweden may, at the same time, be considered resident in another country under that country's domestic legislation (dual residence). If there is a tax treaty between that country and Sweden, there are normally provisions in the treaty to determine in which country a person shall be considered resident in case of dual residence, or how double taxation is to be eliminated. Sweden has negotiated double taxation treaties with over 80 countries including all countries in the Nordic region.

Special rules on taxation apply to foreign experts and key personnel. According to these regulations, only 75% of the income earned is subject to income tax and social security charges during the first three years in Sweden. Some benefits, like school fees and allowances for moving are tax exempt. These regulations apply to foreign personnel employed by a Swedish company or a foreign company with a permanent establishment in Sweden. The employment and residence in Sweden must be limited and not exceed five years, and the employee should not have been a resident in Sweden prior to the employment. To qualify for this exemption it is necessary to obtain a ruling from the National Tax Board, which is part of the Swedish Tax Administration, the application must be filed within three months of arrival.

A Swedish non-resident individual is subject to Swedish income tax only on income arising from sources in Sweden. Therefore expatriates regarded as non-resident individuals will only have a limited Swedish tax liability.

Non-residents will be subject to income taxes on remuneration arising from employment undertaken in Sweden and paid by a Swedish employer. Directors' fees paid by a Swedish company are always considered to have been earned in Sweden, regardless of whether the activities are carried on in Sweden.

As a specific concession non-residents may be taxed at a flat rate of 25% with no deductions applying. The 25% tax is withheld by the employer and is the final tax due on income. In order to

benefit from the 25% flat rate (so called SINK) an application must be filed with the Local Tax Authority in advance, normally by the Swedish employer. There is normally no obligation to file an annual income tax return if you only have income from Sweden that is subject to a “SINK-ruling”. As from 2005 a non-resident may opt to be taxed as a resident in Sweden implying that certain

deductions are available.

Non-resident individuals are generally not liable to pay capital income tax, with the exception of dividends received from a Swedish company, these are taxable unless tax exempt under a double taxation treaty. Non-residents are not generally liable to tax on gains of shares, however in the case of the disposal of Swedish shares there may be a Swedish tax liability on capital gains even for non-residents.

Non-resident individuals are not liable to tax on capital gains from the sale of personal assets. They will only be liable to tax on the gain resulting from sale of real estate situated in Sweden and, where applicable, rental income from letting a home in Sweden (real property or flat).

Expatriate Financial Planning

The Swedish tax regime for non-residents is largely less onerous than the regime for residents, with only Swedish sourced income and gains being subject to tax, an expatriate should take care over whether they attain resident status in Sweden.

In addition, if you are an expatriate currently living in or considering moving to Sweden, you should review your finances with a suitably qualified financial advisor and/or tax advisor. In particular, if you are about to move to Sweden, you should plan and review your finances before making the move. You may wish to consider offshore investments, including offshore life products, in order to manage your tax liability and/or control when tax charges are made, as well as considering options available to you for estate planning.

Life Insurance and related products

The specific benefits of an offshore life product will depend upon your individual circumstances. The benefits that are on offer are;

• Investments in an offshore life product grow virtually free of tax throughout the time the product is held, suffering only a small amount of irrecoverable withholding tax on investment funds located in certain countries.
• They allow you, in general, to manage when you take benefits and potentially to defer the benefits to a period that may be more advantageous to you from a taxation perspective.
• Offshore products often feature a strong range of the life company’s own individual offshore funds and managed offshore funds specifically tailored to fit with the spread in clients’ attitudes to risk. Offshore products also offer access to household name fund managers, including many international and specialist fund managers.
• An offshore product has the flexibility to adapt to changes in your individual circumstances, this includs changes in your residency status.
• Most companies offering offshore life products are subsidiaries of global financial services companies.
• The offshore life companies are regulated in first class jurisdictions which benefit from strong regulatory controls.