Have you ever thought of starting a company in a low tax jurisdiction – a so called tax haven? Incorporating in British Virgin Islands, Cayman Islands, Bahamas, or perhaps Dubai (UAE) has been a popular strategy for international corporations, entrepreneurs and investors, to benefit from the non-existing corporate tax.
However – many states, including Sweden, has implemented so called CFC (Controlled Foreign Corporation) to strike down on these tax strategies.
Who does the Swedish CFC rules apply to?
Today, the Swedish CFC rules applies both to corporations and individuals, that owns or controls the shares in a foreign (non-Swedish) company. There is a cap set at 25 % ownership – meaning that holdings which falls below 25 % are not subject to the Swedish CFC rules. In relation to individuals, a person must be a Swedish tax resident, for the rules to apply.
In relation to companies, the entity must either be a Swedish company, or a foreign company with a permanent establishment in Sweden, for the rules to apply. Since Sweden can retain its right to treat also persons who have moved from Sweden as tax residents, it is important to have a clear understanding of whether one is tax resident in Sweden also after moving from Sweden. This especially important if a person relocates to a low tax jurisdiction.
As mentioned, it is sufficient that an individual or company controls the foreign company, meaning that there is no requirement to hold actual shares in the foreign company. One has to examine Swedish case law, in order to assess what kind of control that is regarded as sufficient enough to be subject to the CFC rules. Also, indirect ownership is covered by the rules, i.e. a company or individual cannot be exempt from the rules by placing a company in between itself and the foreign company.
Another important aspect of the CFC rules is that sometimes, related persons’ ownership can be added, meaning that a group of owners can be regarded as one owner, when determining whether the 25 % requirement is fulfilled. In this regard, an individual owning shares in a foreign company directly, but also indirectly through another company, can be covered by the rules.
What kind of foreign company is subject to the Swedish CFC rules?
Apart from the 25 % ownership/control requirement, the foreign company must also be seen as subject to low tax. The meaning of this requirement, is, in oversimplified terms, that the foreign company has to be taxed with less than 11,33 % Corporate Income Tax.
Are companies in all jurisdictions subject to the Swedish CFC rules?
A very important exception to the requirement of the foreign company being subject to low tax, is that such a company can be exempt from the Swedish CFC rules if the company is resident in certain jurisdictions. In more detail, Sweden has a list with different countries, whose companies are not covered by the CFC rules, even if subject to low tax. This list goes under the name “the white list”.
Exception for EEA/EU companies
Furthermore, due to EU tax law, a foreign company that is subject to low tax can also be excepted from the CFC rules, if the company is resident in an EEA jurisdiction in which it has sufficient substance. The meaning of this exception, is that companies in a EEA state that has a ‘real’ establishment in the state, will not be covered by the rules. An overall assessment is to be made, in which factors such as whether the company has a physical office, employees, or other resources in the EEA state. The assessment is largely based on EU case law, as well as Swedish case law.
Accordingly, one can own a foreign company in an EEA state with low taxed income, without being subject to the CFC rules, provided that the company has a real presence in that EEA state. So called letter box companies will therefore usually not qualify for this EEA exception.
What is the effect of the Swedish CFC rules?
For an owner of a foreign CFC company, the effect of the CFC rules is that the owner itself will be taxed on the foreign CFC company’s income. The tax is computed by applying Swedish domestic tax rules, i.e. the owner will be taxed as if having performed the CFC company’s business itself.
Concluding remarks
The Swedish CFC-rules covers ownership exceeding 25 % in a “low taxed” non-Swedish company
There is a “white list” that exempts companies from certain jurisdictions, even if they are “low taxed”.
Ownership in companies from a EEA state are exempt from the rules, provided that they have sufficient substance, i.e. a real presence, in the EEA state.
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