Are you an expat living in Sweden, that plans to start up a business as an independent consultant? Sweden is renowned for high taxes – but are the taxes really that high? What company form should a consultant start? Can a consultant do business as a sole trader, instead of starting a company? Let us answer these questions.
Consultants acting through a Swedish limited liability company
The most commonly used company form, is the Swedish so-called “Aktiebolag”, which is a limited liability company. The minimum share capital requirement to start a limited liability company is 25 000 SEK. On top of that, there are some registration fees and other start up costs. The corporate income tax rate is levied at 20,6 %. There are tax deferment possibilities available. Also, capital gains and dividend income can be received tax free for the company, if subject to a so-called participation exemption rule.
One of the main benefits of starting a Swedish limited liability company (aktiebolag), is that the owner of the entity will only risk the capital he/she has invested in the company. The company’s economy is totally separated from the owner’s. Further, the owner of a Swedish limited liability company, is able to distribute dividends to him/herself, from the company.
Sweden’s special tax rules for owners of small companies ('3:12-rules').
However, there are special Swedish tax rules governing the taxation of dividends and capital gains on so-called “closely held companies”, which are companies with less than five shareholders. The rules are known as the “3:12-rules” – a reference to the old Swedish tax law, where the rules were placed in chapter 3, paragraph 12 of the law. The rules are very complex, why most Swedish company owners receive professional tax advice in order to lessen the high tax burden the rules can bring with them.
The 3:12-rules implies, as a main rule, that an active owner of a 'closely held company', will have his/her dividend income taxed as employment income. This means that the very high Swedish tax rates will apply also on dividend distributed from the company. These rules will apply to every consultant living in Sweden that has his/her own company. It also applies to ownership in non-Swedish companies.
Luckily, however, there are some exceptions. A person that owns shares of a limited liability company, is entitled to receive dividends from his/her company, that is taxed at a 20 % tax rate, up to a certain annual threshold. Dividends exceeding the threshold is taxed with employment income tax rates (30 – 55 %). There are various factors affecting this threshold level, but every person that holds 100 % of the shares in a limited liability company is always entitled to dividends taxed at 20 %, up to 204 325 SEK per annum (2024). A tax lawyer is usually hired to optimize the 20 % dividend threshold for the owner, since tax planning can be used to increase the threshold.
Swedish taxation of consultants acting as sole traders
In Sweden, a consultant can also set up his/her business as a sole trader. A sole trader is not a company. Instead, the consultant is him/herself operating a business as an individual. This implies that the consultant will be personally fully liable for agreements entered.
Normally, a consulting sole trader should register with the Swedish Company Registration Board – ‘Bolagsverket’. The consulting sole trader should also obtain a Swedish F-tax certificate, in order to avoid withholding tax on its invoices. VAT registration should also be done.
But how is a sole trader’s business income taxed? A sole trader’s business income will be subject to the same tax levels applying for employment income, i.e. approximately 30 – 55 %. There are some tax deferment options available. Furthermore, the consulting sole trader will be liable to pay Swedish social security contributions, amounting usually to 28,97 % of the annual result (profit).
Conclusions
The Swedish ‘3:12’-rules implies that dividend can be withdrawn at 20 % tax, up to a certain threshold. This can be favorable for consultants acting through a Swedish limited liability company (aktiebolag).
A consultant can also operate as a sole trader. However, the tax rate applying is rather high (30 – 55 %).
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