In November 2024, the Swedish Tax Board (Skatterättsnämnden) issued a new advance ruling (32-24/D) regarding substantial affiliation due to shareholding in a Swedish company, also known as significant influence in business activities. This decision marks a shift from previous case law and could potentially introduce a more flexible assessment for individuals who have lived in Sweden for only a short time.
What is Substantial Affiliation?
Substantial affiliation (väsentlig anknytning) is one of three alternative grounds for unlimited tax liability in Sweden. This concept means that a person who has left Sweden can still be considered tax-resident in Sweden if they maintain strong ties to the country. A comprehensive assessment of the person’s affiliation with Sweden must be made, but Swedish case law has primarily identified three key factors (so-called "connection points") that are most likely to result in substantial affiliation:
Family in Sweden.
Ownership of a former permanent residence in Sweden.
Economic involvement in Sweden.
Regarding the third factor, case law generally holds that owning more than 10% of the shares in a Swedish company constitutes substantial affiliation. However, exceptions exist based on case law. For instance, there are situations where individuals have owned more than 10% of a Swedish company but were not deemed to have substantial affiliation due to their prolonged residence abroad.
What is a Swedish Advance Tax Ruling?
In Sweden, there is a special court that issues advance rulings (förhandsbesked) in tax matters. If an individual or a company wants to determine in advance how a specific matter will be treated for tax purposes, they can apply to the Swedish Tax Board. Advance rulings are legally binding on the Swedish Tax Agency (Skatteverket).
Advance rulings follow a special process in the legal system and can be appealed directly to the Supreme Administrative Court (Högsta Förvaltningsdomstolen, HFD) without requiring leave to appeal. Consequently, a relatively large proportion of the Supreme Administrative Court's precedents originate from appealed advance rulings.
What Were the Circumstances of the Swedish Advance Tax Ruling?
The case involved the following circumstances:
A, a citizen of Country B, had lived in Sweden between 2005 and 2006 and returned to Sweden in November 2022 with his wife.
A owned X AB, which indirectly and directly held approximately 28% of the shares in Z AB, a company he founded in 2016 while residing in another country.
A planned to relocate to the United Kingdom to manage a new business in London. In connection with the move, he intended to terminate his Swedish lease agreement and resign from all Swedish assignments, except for his board membership in Z AB. After the relocation, his sole remaining tie to Sweden would be his ownership interest in Z AB.
Thus, the individual in the advance ruling, A, had been a resident of Sweden only briefly—between 2005 and 2006, and from November 2022 onwards. A’s ownership of over 10% of the shares in a Swedish company would typically, under case law, result in substantial affiliation with Sweden.
What Did the Swedish Tax Board Conclude?
The Swedish Tax Board, in a relatively brief statement, concluded that A would not have substantial affiliation with Sweden following the planned relocation, despite owning more than 10% of the shares in a Swedish company.
In previous case law, particularly in HFD 2019 ref. 12, the Supreme Administrative Court stated that if a person has lived abroad for an extended period, this could mean they do not have substantial affiliation with Sweden, even if they own more than 10% of the shares in a Swedish company.
Based on this new ruling, it appears that there is now room to also consider how long a person has resided in Sweden when determining substantial affiliation. It remains to be seen whether the Swedish Tax Agency will appeal the advance ruling. If it stands, this decision represents a positive development for individuals, as it suggests that persons who have been resident in Sweden for only a relatively short period could avoid being deemed to have substantial affiliation.
Conclusion and Implications
This advance tax ruling represents a notable shift in how substantial affiliation is evaluated, particularly for individuals with only brief connections to Sweden. By factoring in the duration of residence, the decision introduces a more flexible and nuanced approach compared to current case law. If upheld, it could benefit expatriates and international professionals by reducing the likelihood of being classified as tax-resident solely due to business interests in Sweden.
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