Tax and Legal

Legal issues and taxation of private persons

During life, we are often changing legal status several times. We get married, we get children, and we sometimes get divorced, start companies or we move abroad. All these events affect your economy and it is not always straight forward to grasp the legal effects of these changes. It can sometimes be quite emotionally burdensome when legal differences occur with persons that are close to us. If a dispute occurs it is normally due to the fact that the legal positions are unclear or undefined. To avoid this, it is advisable to have a lawyer help you to clarify this before something happens.

The laws regulating family and domestic issues are primarily found in Äktenskapsbalken, Sambolagen, Föräödrabalken and Ärvdabalken. Our lawyers are also specialised in individual taxation and international relocation.

Marginal tax planning

The part of your income that is above the state tax threshold (about 384 000 SEK in 2010) at more severely taxed than the part of your income that is below. This is due to the fact that everything above that threshold is subject to state tax (20-25%). The income below is only subject to communal taxation and that varies about 6% points depending on in which commune you live. Typically it is around 30%. The objective of marginal tax planning is to smooth the declared income over the years so that it stays below the state tax threshold.

Pension savings are deductable in certain ways and therefore useful as a marginal tax planning instrument. The money are then taxed when the pension saving is terminated. If you are having a high marginal tax when the premium is paid and a low marginal tax when the pension plan is terminated an obvious tax gain sis don. It is however also favourable to use a pension plan as a tax planning instrument if the marginal tax is unchanged, since you are given an interest rate free tax credit until the savings plan is terminated and you chose to distribute the money.

Salary swapping is another way of reducing your declared income. This is done in practice by your employer swapping a part of your salary into pension. This is a highly effective way to reduce declared income, especially as it allows employer to put more into a pension plan than what is deductable should you chose to do it as a private person. On top of this there is the effect of different social charges for salaries and pensions. The employer pays 31,2% in social charges on your salary, but only 24,2% on pension payments. Hence there might be a possibility to negotiate and share this “tax profit”.

The rules for Accumulated Income could also be used as a marginal tax planning instrument. These set of rules is about income that is paid during one year but originates from several years. Examples lump sum payment of a pension, sale of intellectual or art products that has been created over several years, or the part taxed as “Income” of the capital gain on qualified stocks. If this extra income puts you above the threshold, it is under certain circumstances possible to avoid paying state tax.

Deductions is a naturally also a way to reduce declared income. This is done by deducting deductable expenses.

Netting could be used if you have a company classed as “Enskild firma” or a newly a started company classed as a “Handelsbolag” where it is possible to use netting the first five years. Thereby you can net personal income with losses and there by lower the taxed income.

Education and Seminars

Falk & Partners hosts seminars and lectures on various legal subjects. These seminars are highly beneficial and often answer many questions which probably are why they are so popular.

Taxations and legal serviced for entrepreneurs and business owners

Healthy tax planning

After the first few years hard work and red figures, good results and excess liquidity are creating a different set of questions and problems. Others have worked all there life in the family business and are now thinking of retirement. How, when and to who shall I sell my company? These entrepreneurs and business owners all need to think about an important issue; How to minimise tax costs?

Some business owners might think about succession as the younger members of the family are getting ready to run the business. For part owners there are many legal issues involved in a possible sale of the company or a succession. Some rather complex tax issues might arise. This is nothing new to us, and we are glad to help you get the most out of your company. It is crucial to plan ahead to avoid paying too much tax and or high legal costs. By structuring and early preparation this can be avoided.

Double taxation

Double taxation means that a profit, or for that matter a revenue, that arises in a business are taxed twice. First by the corporate tax at the company level and then it is taxed again at the owner level. Usual taxes that hits a company is Special Salary Tax (24,2%), Corporate tax (26,3%) or Social charges (31, 2%). All of the above taxes are taxation at the corporate level. Then owners of the company, the shareholders, are taxed again as they are hit by dividend tax, capital gains tax or income tax. This is called the second level of double taxation. By building structures abroad it might be possible to reduce the effect of this double taxation.

Tax planning via capital gain and dividends

Tax planning with dividends is all about maximising the capital gains taxed, and preferably tax exempt, dividend. The so called “Fåmansreglerna” makes this procedure far from straight forward, but it is well worth the effort. Methods like “Utomståenderegeln” might also be used to tax dividends as capital gain instead of personal income. If the dividend amount is not fully used in a one year, the unused amount could be used another year. This dividend space is increased with a special interest rate over time.  This interest rate is the official state rate +300 basis points. If the owner does not need the dividend, or is planning to place the dividend on a bank account or in the fixed income market after receiving it, it would be more advantageous to keep it n the company. If the owner finds an instrument with higher yield, the amount should be put in a capital insurance structure, where the tax is 0,87% (2010) and the normal corporate profit tax of 26,7 % would not apply on the profit from that financial instrument.

There are 3 ways of calculation dividend:

  1. Normal Rules is 2,5 income “Basbelopp”. This normal divided is often used in small companies with few employees, with low salary costs.
  2. Capital Rules makes it possible to receive a low taxed dividend based on the amount of capital the owner has invested in the company. This is then multiplied with the state rate +900 basis points. This is how much the owner may receive in dividend with a low taxation. Smaller companies with typically a nominal stock value of 100 000 SEK will not opt to use this method as the low taxed dividend only amounts to 12 000 SEK given a state rate of 3%. However if a owner bought a company for 3 000 000 SEK he would be entitled to 372 000 dividend with low taxation.
  3. Salary Rules is often used by companies who have large salary costs. These kinds of companies are entitled to pay a dividend equal to half of the salary cost for the company at a favourable tax rate. However, the owners that are active in the company needs to have a salary of at least 10 “Basbelopp” (502 000 SEK 2010).

    Capital Rules and Salary Rules can be combined, however Normal Rules cannot be combined with the other 2 methods of dividend calculation.

    Lending to the company

    If the owner lend money to her company, it is possible to receive interest rate at a favourable tax rate. The received interest rate is declared as income from capital. One should not charge a too high interest rate if one is active in the company, as this could be seen as salary. A court case in Kammarrätten determined that the interest rate charge may amount to the state rate + 300 basis points.

    Pension

    As an employee there is not much to do in the ways of tax planning using pensions. For 90% of all employees in Sweden, the employer is paying into the pension scheme of the employee.

    However, for the owners of a small company, there are other possibilities. It might not be the most optimal to pay into a normal pension scheme. Depending on the amount one wish to receive from the pension scheme, the amount paid into the scheme has to be decided. If large payments are done, one might find oneself in a sub optimal tax situation at the time when the pension is received. When receiving the pension it is taxed as personal income, which means that both commune tax and state tax might be paid. If large pension payments have been done, it is often highly beneficial to move to a country where the pension income is taxed lower than in Sweden.

    If one for some reason plan to stay in Sweden as a retired, it is advantageous to keep the capital within the company, and invest the amount that otherwise should have been paid into a pension scheme, on other ways.

    Dividend, salary or pension A company owner of a small company who reached 65 years of age and is still deemed involved in the daily business should thoroughly go though the possibilities for finding a tax optimal way of receiving money from the company. The company only need to pay a age pension charge of 10,2% instead of the normal social charges paid for each employee. If the person is born 1937, or earlier, no charge has to be paid at all. From a double taxation point of view it is therefore advantageous to get salary instead of dividend, even if the tax on the dividend is only 20%. Alternatively one can use a “Vilkorat Aktieägartillskott” a few years before one turns 66 and then use the Capital Rule to receive low taxed dividends, and then at 66 reduce the share capital to use the age pension charge rules.

    Before selling the company

    A company has often a financial value also after the founding entrepreneur no longer is active in it. Small companies’ with an entrepreneur as a consultant where all revenues depends on the founders’ personal work is the exception. If the company has some financial assets or liquidity there are some different ways of reduce the taxation of these assets when it is paid out to the owners. Valuing a small company is not always straight forward. The mot common methods are ReturnValueMethod and the SubstanceValueMethod.

    The ReturnValueMethod is based on the present value calculation of future profits. This method is not generally applicable in a consultant company with few employees, where each employee affects the result to a large extent. However this method works well for companies that are built around a patent, licenses, royalties or agents with long contracts. First one determines the company’s profit, and then the future profits are calculated back to today’s present value with an appropriate interest rate. Company A returns 1 000 000 SEK annually, Company B want to buy it and expects a return on capital of 20%. Hence there are prepared to pay 5 000 000 to buy Company A. A buyer who is satisfied with 10% return on capital is prepared to pay 10 000 000 for Company A.

    SubstanceValueMethod is based in the actual assets within the company. All assets on the balance sheet are valued and then the company debt is deducted. Thereafter the net worth, ocr substance value is left. This method i normally chosen when it the financial or physical assets in a company that is of interest. Valuations are often highly specific depending on in which line of business the company is in. Falk & partners has the experience of guiding fair valuations of companies.

    KarnesBolag is often used when an owner is selling his Qualified Shares in a small company. This is a popular structure when selling small companies at present. The aim is to reduce the part that is taxed as personal income. Until 2009 half of the profit from selling the company was taxed as personal income (max 5 000 000 SEK) and the rest as capital gain. From 2010 will the first 5 000 000 SEK always be taxed as personal income and the rest as capital gain. The new law will not change the situation for those making a profit above 10 000 000 SEK. If the owner cease being active in the company will his shares are labels Qualified for the rest of that year and the next 5 years tax years.  These rules make it possible to have an idle company during 5 years. After that time period is up the shares are no longer deemed Qualified and it is then possible to sell the company at 25% tax. It is however highly important that the asset management in the idle company is kept at a minimum, or else will the shares be deemed Qualified.

    Falk & Partners asset management portfolios have a great diversification and are well suited for these kinds of idle companies.

    UtomståendeRegeln, if applicable could mean that that shares in a small company does not count as Qualified. Dividend and capital gains will then only be taxed by 25%, there will not be any personal income tax. If at least 30% of the small company’s shares are owned by an outsider for investment purposes, and those shares are entitled to dividend the UtomståendeRegeln is applicable.  This means that the dreaded so called 3:12 rules are avoided. The definition of an outsider is a person who does not own Qualified stocks in the company. This is especially interesting if eh entrepreneur lack funds to start the company, and then bring sin an external owner. If there is a Cross ownership between 2 companies, or 2 owner with Qualified stocks, the rules do not apply.

    Internal stock sale mean that the stocks are sold to another company which is owned by the same persons as the sellers.  An internal stock sale could be useful at a restructuring of the business, buy-outs, succession or tax planning. A company that has a large amount of taxed equity and large hidden values can benefit from an internal stock sale. It is common to finance tha purchase by aloan from the sellers. The interest rate on this must be reasonable to be taxed at the normal 30%. A positive effect occurs as the seller can benefit from recourses in his company at only 30% tax instead of paying personal income tax. It is highly important that an estimate of the different tax effects is done before an internal stock sale is done.

    Double internal stock sale is done in order for the owner of a company should be able to avoid th3 3:12 rules.  According to these rules a company owner should pay capital gain tax on Qualified stocks at 20% for a part of the shares and personal income tax at 57% for the rest. Stocks owned in a small company is deemed Qualified if the owner has been active in the company during the last 5 years. If the owner create at least 2 new companies, the shares is no longer labelled Qualified, not in a company, nor in a directly or indirectly owned company. By having the shares deemed non-Qualified the owner pays normal capital gains tax at 25%

    According to a court case, RÅ 2009 ref. 31, is double internal stock sale seen as tax evasion and this strategy is no longer viable.

    Shell companies was earlier a very important way to optimise tax costs. However, there are new rules governing this area which makes is less interesting from a tax planning point of view. Reasons for doing a shell company transaction could for example be as an alternative to a liquidation, or a fusion, when restructuring the business or in a buy-out situation. A traditional shell company transaction is done by the selling of a company’s assets and liabilities to another company which has the same owner s the first one.  The stocks in the first company that is now empty, a shell, are sold to a third company. This transaction could give the seller a lower taxation than if he would receive salary or dividend. The drawback is that such a transaction is somewhat burdensome and complicated.

    Possibilities in international jurisdictions are vast. Anyone living outside Sweden and do not have a strong connection to Sweden, and do not live in Sweden more than 6 month per year are free to use the entire flora of international tax planning tools.