An increased amount of states have introduced exit taxes in order to ensure that emigrated person's assets are subject to tax even after seizing to become tax resident.
Often, arguments such as the income being earned in the state, are brought forward to justify the exit taxes. In Sweden, the “ten year rule” has the function of a exit tax rule, by enabling Sweden to tax previous Swedish tax residents that have moved from Sweden and become non tax residents. Learn more about the ten year rule, and the possibility of avoiding it in this article.
What is the Swedish ‘ten year tax rule’?
The rule was implemented into Swedish legislation during the 1980’s – a time when the economy started to go more global, meaning that it became easier to move capital to jurisdictions with less tax. Since its implementation, the rules have been amended various times.
The very foundation of the rule, is that it enables Sweden to tax non tax residents’ capital gains, during ten years after the person sized being tax resident in Sweden. In more detail, the rule requires a person to have been tax resident, i.e. lived in Sweden, in order to be covered by the rule.
In its current form, the ten year rule applies to a variety of securities, such as shares, mutual funds, bonds, and options. A very important limitation, is that the ten year rule does not cover foreign (non Swedish) securities, if they were acquired when the owner was not tax resident in Sweden.
For Swedish securities, such as shares in a Swedish company, there is no limitation as the one mentioned.
Unfortunately, the ten year rule covers also holdings that are subject to the Swedish 3:12 regime. Even after moving abroad, the person will, if not prevented by a tax treaty, become taxed with the ultra high tax rates of the regime. However, there are workarounds available with professional tax advice.
What is the effect of the Swedish ‘ten year rule’?
Lets say a German person moves to Sweden, and lives in the country for a couple of years. During the time in Sweden, the person acquires shares in a Cypriot company. Now the person wants to move back to Germany.
By reason of the person acquiring the shares when being tax resident in Sweden, the shares will be subject to the Swedish ten year rule, meaning that Sweden wants to tax any capital gain derived from selling the shares, during ten years after the person moving back to Germany.
Since the Swedish taxes are fairly high, the person would of course want to avoid becoming subject to this special exit tax.
Are there ways to avoid the Swedish exit tax (the ‘yen year rule’)?
Luckily, it is in some cases possible to avoid or decrease the effect of the Swedish exit tax. Normally, this is done through the application of tax treaties, since these often limit the Swedish exit tax. According to some tax treaties, the ten year rule is not valid at all. According to other tax treaties, the ten year rule is only valid for five years, and/or only valid in relation to Swedish citizens.
A analysis has to be done of each exit case, in order to determine the effect of a tax treaty. Also, applying a tax treaty generally requires the person to have his treaty residency in the state he moved to. This can usually be achieved with some tax planning.
Also, holdings in an account taxed with the Swedish ISK tax regime is not subject to the Swedish exit tax. Therefore, an exit from Sweden can sometimes be properly planned, by executing sales of securities, and buying them back at proper timing, leading to no tax in Sweden, and a so-called step up which can imply huge tax savings in the future.
Lastly, there are also advanced tax strategies available in some instances, which enables a capital gain being reclassified as dividend income, leading to the Swedish ten year rule not being applicable. This requires advanced tax advice.
Are you considering to move from Sweden, and would like to receive tax advice in relation to the Swedish Exit Tax, i.e. the so-called ten-year-rule? Please contact us to learn more about our offer.
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