The nominal corporate tax rate is 28%.
Corporate Income Tax Calculation
The following illustrates the computation of the effective corporate tax on taxable corporate income for 1995:
Calculation of effective corporate tax
Taxable corporate income 1995 before appropriation to the profit allocation reserve 2,000,000 Deduction for profit allocation reserve 500,000 Net taxable income 1,500,000
28% tax on 1,500,000 = 420,000
Effective tax rate (420,000) on income before profit allocation reserve (2,000,000) = 21%
Each year's profit allocation reserve must be added back to taxable income no later than five years after the year of allocation and deduction. The profit allocation reserve is based on net income before tax and includes any amounts from the profit allocation reserve that are added back into taxable income.
Determination of Taxable Income
In principle, resident companies are subject to tax on worldwide corporate income, and the taxation of non-resident companies is limited to income from certain Swedish sources.
Determination of Residency
The residency of a company is not determined by law. Instead, a distinction is made between Swedish registered companies and foreign legal entities. A company registered with the Patent and Registration Board (PRV) is considered a Swedish company and therefore a resident taxpayer.
Income from all business activities is aggregated as one source of income, i.e. income from business. Corporate income tax is, in principle, levied on the world-wide income of a Swedish resident company with the exception of domestic and certain foreign dividends. The foreign-source profits of Swedish companies marketing abroad directly or through a branch office are also subject to Swedish tax unless otherwise provided in a tax treaty.
Capital gains are taxed as business income at the normal corporate tax rate. In computing taxable capital gains, however, capital losses on portfolio shares are deductible only from capital gains on similar shares.
The gain on sales of stock and similar financial instruments is fully taxable, regardless of the period of ownership. Taxable capital gain is computed using the average cost method (the average cost per unit times the number of units sold).
A gain on the sale of real property is taxed as income from business.
Under tax law in effect beginning 1 January 1991, no indexation is permitted in calculating the gain on any type of property.
Payments to individual or corporate shareholders, in the form of a distribution as a result of a liquidation or merger, are now considered to be a capital gains transaction subject to tax only in the owners country of residence.
Under prior law, income year 1991 to 1993, appropriations were made to the tax equalisation reserve for deductions for income tax purpose. 90% of this untaxed reserve must be added back to taxable income not later than the income year 2000. The remaining 10% has normally been added back as a taxfree income. If the company's operations are discontinued, any remaining deferred amount of the tax equalisation reserve must be added back to taxable income immediately.
Generally all Swedish business entities, except for investment companies, holding companies and mutual funds, have the right to make deductible appropriations to the profit allocation reserve. The profit allocation reserve effectively defers tax on business income for five years. It is not a general reserve, but allows a business to equalize profits and losses between different income years. Allocation of up to 25% of the annual taxable profits to the reserve and deduction of the allocation each year is permitted. These allocations must be added back to taxable income within five years after the deduction was taken.
Each year's deduction is a separate reserve, allowing the business a maximum of five reserves. An allocation made and deducted during year one must be added back to taxable income during year six. The addition, however, may be included in the base for the calculation of the allocation during year six, i.e. the prior year's deduction is added to the profits of year six for purposes of determining the 25% maximum allocation for year six.
The effect of the profit allocation reserve, that evens out profits over a five-year period, is that the nominal tax rate of 28% is reduced to a current tax of 21% while deferring the remaining 7% five years into the future. A present value computation indicates a real tax rate of approximately 23%.
The cost of equipment with a life of three years or less may be deducted in the year of purchase.
Machinery and equipment may be depreciated using either the straight-line method at 20% of cost annually or the declining-balance method at 30% of current book value annually. In any one year, the same method must be used for all machinery and equipment, but a company may change methods from year to year.
The same rules that govern the depreciation of machinery apply to the amortisation of patents, trademarks, goodwill and other intangible property.
All buildings owned by legal entities are treated as business real estate, and they are depreciable using the straight-line method over the building's expected life. Annual depreciation is generally limited to 4% for factory buildings, 2% for office buildings and 1.5% to 5% for commercial buildings. If building deterioration is more rapid in a particular industry, a rate between 3% and 5% may be used.
Fixed assets attached to buildings are depreciated according to the general rules of machinery and equipment.
Foreign Tax Exemption and Credit
Double taxation relief is provided by allowing taxpayers to take a credit for foreign taxes paid or to deduct foreign taxes as an expense. The credit is limited to the lower of the foreign tax actually paid and the Swedish tax on all foreign-source income. If a credit is elected, a three-year carry forward is available.
According to most double tax treaties, a credit may be taken for foreign taxes paid to the extent of Swedish taxes on the same income. However, under the Swedish unilateral credit system, a credit may be taken to the extent of Swedish tax on all foreign-source income. An exemption system is used only in certain old treaties and for most inter company dividends.
Losses may be carried forward indefinitely, but no carry back is allowed. The tax law includes rules restricting the use of tax losses of acquired companies. In general, a transfer of the losses of the acquired company to another company in the group is prohibited if the purpose of the acquisition is to transfer such losses. The rules also include a restriction under which the amount of losses that may be used is limited to twice the amount paid for the shares. There are also special restrictions regarding mergers and bankruptcy.
Capital losses are generally deductible from ordinary corporate taxable income. However, losses on portfolio investments are deductible only against portfolio gains.
Treatment of Groups of Companies
Companies are treated as a group when a parent company directly or indirectly controls more than 50% of the voting rights of another company. Companies in a group may not file a consolidated tax return as a single entity, but they are permitted to make group contributions to another group member. To be allowed as a tax deduction for the payer and to be considered income to the recipient, a group contribution to a company within the same group must satisfy all of the following conditions:
- The entities must be Swedish entities.
- The parent company can be either a corporation, an economic association, a savings bank or a mutual insurance institution. The subsidiary must be a corporation or an economic association.
- At the beginning and end of the financial year, one company must own more than 90% of the other company, or both the contributor and the recipient have a common parent owning more than 90% of the stock of each.
- Neither the paying or the receiving entity may be a housing company, an investment company or a holding company. A housing company is engaged in housing and taxed according to standardised income rules. To qualify as an investment company a large number of individuals must be shareholders and the company is taxed according to special rules. The definition of a holding company is limited to a Swedish company that holds and manages securities and other instruments, but does not manage real property. A pure holding company cannot conduct business, other than a minor amount, either directly or indirectly. Thus, the business operations of a subsidiary would prevent a parent company from being classified as a pure holding company.
- Both the payer and the recipient must file, and make full disclosure of, the group contribution during the same assessment year.
- If the group contribution is paid from one subsidiary to another subsidiary, the parent must either be an investment company or a holding company, or if not, be either exempted from tax on dividends received from the paying subsidiary, or subject to tax on dividends received from the subsidiary receiving the group contribution.
- The recipient entity can not be a tax resident in another country according to the residency provisions in an applicable income tax treaty.
Dividends paid by one Swedish company to another are not subject to corporate income tax if the recipient owns at least 25% of the payer's voting power at year end. This threshold percentage is lower if the recipient or a group company is engaged in a related business, such as an activity in which materials produced by the payer are used.
The following rules apply to investment companies and mutual funds, other than public saving funds:
- Capital gains on shares and similar financial instruments are tax-exempt and capital losses are not deductible.
- Taxable income will include a notional income amount equal to 2% (1.5% for mutual funds) of the market value of the investment portfolio at the beginning of the year.
- Interest income and dividends received are taxable.
- Administration and interest costs are deductible.
- Dividends paid are deductible, but only to the extent that they do not create a tax loss.
Investment companies, holding companies and mutual funds, do not have the right to make deductible appropriations to the profit allocation reserve.
Dividends, Interest and Royalties Paid to Foreign Affiliates
Management charges, service fees, royalties and interest paid to foreign affiliates are not subject to withholding tax. They are also fully deductible provided they arose from arm's length transactions. Although royalties paid to non-residents are not subject to withholding tax, they are taxed as Swedish-source business income at the rate of 28%, unless a reduced treaty rate applies.
Under the Companies Law, the amount of a dividend must be reasonable based on the financial position of the payer. A withholding tax of 30% is imposed on dividends to a foreign shareholder, but this tax is reduced to 15% or less by Sweden's double tax treaties.
The contents of this article are intended as a general guide to the subject matter. Specialist advice should be sought for your specific circumstances.
For further information contact Per Snellman on Tel: +468 613 9000 0r Fax: +468 791 7511; or enter a text search 'Ernst & Young' and 'Business Monitor'.