Introduction
In February 2025, the Swedish Administrative Court of Appeal in Jönköping delivered a ruling concerning the tax classification of a Liechtenstein foundation, founded by a Swedish national. In this case, the Swedish Tax Agency adopted a stance that differed from its usual position. This stance could be beneficial for individuals holding interests in foreign trusts or foundations but may still lead to a significant tax liability and tax penalties in cases of non compliance.
Case Circumstances
The case concerned a reassessment matter in which the Swedish Tax Agency retroactively reassessed the taxation of a Swedish individual. The matter was first appealed to the Administrative Court and subsequently to the Administrative Court of Appeal.
Background:
A Swedish individual transferred shares in a Swedish real estate company to a Liechtenstein foundation that he had established himself.
The foundation thereby assumed ownership of the Swedish real estate company.
The individual exercised extensive control over the foundation, as evidenced, among other things, by his signing of bank documents related to withdrawals from the foundation's bank account.
The individual received disbursements from the foundation amounting to approximately SEK 1.4 million and claimed that these were loans.
Swedish Tax Treatment of Foreign Foundations/Trusts
The transfer of assets to a foreign trust or foundation is common, particularly in common law jurisdictions such as the United Kingdom and the United States. However, the treatment of such foundations or trusts under Swedish tax law has long been unclear. In recent years, the Supreme Administrative Court (HFD) has clarified that a foreign trust or foundation may be treated in one of two ways:
1. Equivalent to a Swedish family foundation
The assets must be sufficiently separated from the founder's control.
The foundation is not taxed in Sweden, but disbursements to Swedish recipients may be taxed as employment income (up to 55% tax).
2. Not equivalent to a Swedish family foundation
The founder/settlor may be considered personally liable for taxation on the foundation's income.
The founder is subject to Swedish capital gains tax, typically at 30%.
Classification | Taxation |
Equivalent to Swedish Family Foundation | Distributions are taxed as employment income (up to 55 % tax) |
Not equivalent to Swedish Family Foundation | The founder/settlor is taxed on ongoing income (30 % tax) |
The Swedish Court's Assessment
In the case, the taxpayer argued that the foundation was equivalent to a Swedish Family Foundation and that the distributions were loans. However, the Swedish Tax Agency argued that the foundation did not meet the criteria for a Swedish family foundation and that the individual should therefore be taxed on the foundation's ongoing income.
The Swedish Court found that:
The individual could withdraw funds from the foundation's bank account with only his or his partner's signature.
The foundation's statutes allowed for amendments or revocation.
New entities could be established within the foundation that had the right to issue instructions to the board.
Consequence:
The court concluded that the foundation's assets were not sufficiently separated from the individual's control and that it therefore could not be considered equivalent to a Swedish family foundation. The founder was ordered to pay approximately SEK 1.2 million in tax.
Conclusion
Foreign foundations or trusts can be useful for estate planning and asset protection from creditors. However, if the founder (settlor), trustee, or beneficiaries are fully liable to tax in Sweden, unexpected tax consequences may arise.
Key takeaways:
Having control over a foreign foundation may result in the founder being taxed on the foundation's income.
The specific circumstances determine whether a foundation should be considered an independent legal entity for tax purposes or whether its assets should be taxed at the founder's level.
At nomadtax, we regularly assess foreign trusts and foundations for our clients. These assessments may lead to a recommendation to submit a voluntary correction to the Swedish Tax Agency, which can eliminate the risk of tax surcharges in cases of previous non compliance. We also assist clients with advice on how a trust or foundation should be structured to achieve optimal treatment under Swedish tax law.
Comments