Exit Taxes in Sweden
| Author | Leif Mutén |
| Pages | 1-18 |
Page 1
The provisions on who is a resident for tax purposes are fairly stiff. 12During the first five years after leaving the country, the taxpayer has the burden of proof that he has broken his connections with Sweden, in particular economic ones, and the tax authority may treat him as still a resident, regardless of whether he has taken up residence elsewhere and established a stronger connection with another country than he has kept with Sweden. A home in Sweden, e.g., is considered a connection, but not a summer house. A spouse left in Sweden is a connection if not estranged. A corporate board membership may imply a connection but not the holding of shares in public companies. It should be added that no tax liability is connected with the citizenship as such, and if effectively shifting is country of residence, a Swedish citizen can escape the Swedish tax claim. The citizenship is just one connecting factor and it is not regarded as such a connection with Sweden that must make the tax authority deem him still to be a resident.
Sweden has a wide concept of taxable income, including capital gains. Capital gains are in principle deemed to be income from capital. Like in virtually all income tax systems where capital gains are included in the tax base, a gain has to be realized to be taxed. This constitutes the basic problem that the value accretion of an asset might have taken place during the owner's residency in Page 2 Sweden, but liability to tax may arise at a time when the taxpayer has taken up residence abroad.
The liability to pay tax on realized capital gains lies largely on residents. If a person is resident abroad, he is basically not liable to tax on capital gains on Swedish assets, except gains on real property. Gains realized in a business are taxable in so far as the business is carried on by a permanent establishment in Sweden. Some tax treaties give Sweden the right to tax capital gains on shares in companies, the main assets of which are real property in Sweden, but the domestic law does not provide for Sweden's right to tax in this case, the treaty provision thus remaining a dead letter.
The Income Tax Act of 1999 (SFS 1999:1229, henceforth ITA) Ch. 3 section 19, stipulates that a person leaving his residence in Sweden remains liable to tax on the capital gains he realizes on Swedish shares during the first ten years after his emigration. The provision does not make any difference between shares held at emigration and shares acquired later.3 There is no step-up if the shares are given to somebody else, nor if the taxpayer dies. The recipient of the gift or the estate (or the successor to the shares) must use the same cost basis as would have applied to the donor or deceased, respectively, but if the taxpayer has not been resident or steadily present in Sweden at any time during the last ten years, he is not taxable on his gain in Sweden.
It is obvious that this exit provision does not agree with the OECD model convention, Art. 134. In numerous negotiations Sweden has sought to gain acceptance of its rule, but in most cases it has had to accept a shorter period, usually five years, after which its claim to tax is not valid any more. It is easy to figure out that the technical enforcement problem raised by this rule is considerable. The emigrating taxpayer, if his connections with Sweden are effectively severed, will not be on the tax roll. Therefore, a tax return will as a Page 3 rule not be issued and filed. For what it may be worth, I have a personal experience of trying to pay capital gains tax relating to Swedish shares on behalf of a member of my family, since three years earlier resident abroad. Visiting the Stockholm central tax office, the counter dealing with international matters, I had to insist on the tax officer asking her principal before my request for a tax return form was granted. Until then I was told that no tax was payable, the taxpayer living abroad being out of the system.
No study has been made on the revenue yield from this provision. Of course, more important emigrants might well be the subjects of more interest on the side of the tax administration. In the great number of ordinary residents leaving Sweden, however, one can assume that compliance is much less than full, and that enforcement, if any, will be weak.
In a bill to which we shall return below, the Swedish government has pronounced that this provision is not an exit tax.5 This attitude is certainly not uncontested.6If at all seen as an exit rule, however, the rule might well stand the tests of de Lasteyrie du Saillant7 and N8. No tax is due until realization, and no collateral is required to protect the tax claim of the Swedish fisc. There is, needless to say, no rule ensuring Swedish tax on the accumulated gain on the date of emigration, since losses occurring after that date will influence the net gain taxable under the provision. There is no claim to tax before selling, and even in this respect there is no element in the tax rule that could impose a restriction on an emigrating taxpayer or limit his freedom of movement or of establishment abroad. At most, one could state that the rule could deter prospective emigrants from investing in Swedish shares, and holders of Swedish shares from taking up residence in Page 4 Sweden, but while it would carry the matter too far to quote the ECJ judgment in Werner (C-112/91)9 it is doubtful whether such a deterring effect could be found to be a discrimination or affect any of the treaty freedoms.
It is perhaps interesting to note that in two cases, the Swedish government has taken measures to stop the opportunity for Swedes to use tax conventions to avoid capital gains tax. The old DTA with Peru was terminated for that reason as of January 1, 2007. Peruvian tax rules in connection with the exempt method being applied in the treaty had opened the door to abuse in liquidating Swedish closely held companies with accumulated profits. Another case was Austria, where the treaty in force contains no provision giving effect to ITA 3:19. This opened an opportunity for holders of Swedish shares to move their residence to Austria and realize their gain paying no tax, given the step-up of cost basis granted under Austrian law. A new Article 8 of the DTA, containing a right to apply ITA 3:19, was signed in 2006 but had not yet been ratified by Austria in March 2007. In a new Swedish law effective January 1, 2007 the protocol is stipulated to be in force from that date. This must be regarded as a treaty override, very much in contrast to Swedish tradition, but the law council (a committee of three judges from the Supreme Court and the Supreme Administrative Court, vetting new laws on their practicability and their accordance with other laws, in particular the constitution) had no objection. It referred to the fact that the new protocol had been agreed on and that in the unlikely case of Austrian opposition new negotiations could be undertaken.
In neither of these cases does it seem possible to apply the two exit tax cases we are focusing on here. All the more, however, does the ECJ case law raise problems in the application of the Swedish law provisions aiming at saving business profits as a tax base for the Swedish fisc. More about that in the section on legal entities. Page 5
One particular rule on capital gains was tested in the case X and Y (C-436/00).10Here, the issue was the transfer at below market value of shares in a closely held company. According to a rule introduced 1998 in the old state income tax act and taken over unchanged in the 1999 ITA Ch. 53 Secs. 6-8, transfer at a price below the market price could imply capital gains tax as if the market price had been paid. This was the rule if the transfer was to a foreign legal entity in which the transferor or somebody related to him directly or indirectly had an interest or to a Swedish entity in which such a foreign entity had an interest.
The Swedish tax authority maintained that this was a domestic case not implying EC law, but the ECJ dismissed this argument and found a violation. In the first place, the rule was precluded by Art. 43 and 48 EC11. Since in the first case the violation occurred only when the Swedish owner had a definite influence over the decisions of the foreign legal person, the Court, moreover, added that if this was not the case, there still was a violation of Art. 56 and 58, concerning the freedom of capital movements.
Turning to the question whether these measures were justified, the Swedish authorities in the first place referred to the cohesion of the tax system, an argument soon dismissed by the Court. The argument that the rule was necessary to defend the tax base was likewise dismissed, and even more firmly was the argument rejected that the rule was necessary to prevent tax avoidance.
The Swedish government took some time before asking a sitting committee working on business tax matters to propose a new law on the matter that could be compatible with EC law. In its final report, however, the committee did not present any new proposal, and the old legislation remains on the statute book, albeit presumably not being applied any more. Page 6
Like several other countries, Sweden has a rule mitigating the capital gains tax on the taxpayer's alienation of his home. It has the form of deferring the capital gains tax if the proceeds of the...
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