The Swedish rules targeting closely held companies were introduced in the beginning of 1990s as a respond to the practise of income shifting (where owners of a closely held company took out income in the form of lower-taxed dividends instead of salary as compensation to their work efforts in the same company). Today, these rules regulate whether dividends and capital gains paid to owners of closely held companies should be taxed as capital income, or if parts of the income should be taxed as employment income.
The regulations are however complicated and the calculations required under these rules are complex. Thus, instead of highlighting parts of the rules that may be up to discussion (there might be many), the key features of the regime have been summarized on a very high-level below.
- A company is considered closely held if four individuals owns at least 50 percent of the shares in the company.
- A share in a closely held company is considered a qualified share if the owner, or any of his close relatives, has been working actively in the company to a significant extent. When assessing whether the criteria for a qualified share are fulfilled, the circumstances during the tax year and the five preceding tax years is of relevance.
- A share is also considered qualified if the owner, or any of his close relatives, has been working actively in another closely held company that conducts the same or similar business, to a noteworthy extent. In case law, it has been stipulated that the expression same or similar business mainly refers to cases where all or parts of the business of a closely held company are transferred to another such company, and where the business of the latter company is within the scope of the previously conducted business or when there is a certain connection between the companies (see e.g. RÅ 1999 ref. 28, RÅ 2010 ref. 11 I-V and HFD 2011 ref. 75).
- Shares are however not considered qualified if an external investor (which is not related to the company or any of the other owners) owns at least 30 percent of the shares in the company, and has a right to receive dividends with a corresponding percentage. Again, the circumstances during the tax year and the five preceding tax years must be taken into consideration when making the assessment.
- Qualified shares are taxed under special rules. Owners should annually calculate a threshold amount up to which the owners pay a caped capital gain tax of 20 % on dividends and capital gains from the closely held company (sw. gränsbeloppet). This threshold amount is calculated based on a standard amount, or with varying variables such as the acquisition value of the shares and the salary paid to any employees of the company or any subsidiaries.
- If the amount of the dividend and/or capital gain is exceeding this threshold amount (gränsbeloppet), the remaining part is taxed as income of employment up to another threshold amount (sw. takbeloppet). Dividends and capital gains exceeding the latter threshold is taxed at a tax rate of 30 %.
- An owner of a closely held company must attach a special form (K10) to his or her annual income tax return. In this form, the thresholds are calculated and reported, as well as received dividends and capital gains. For those who do not receive dividend or sell shares can roll over the threshold amount (gränsbeloppet) for future years, with no cap in time. This means that owners can build up a relatively large threshold amount to which dividends and capital gains are taxed with 20 % tax.
With the right management and planning, it is possible to use the rules targeting closely held companies as a tool for tax optimization. Thus, if the rules may be applicable, it is recommended that the company structure is analysed before proceeding with distributions of larger dividends, an exit or IPO. Also, it is important that owners of qualified shares are observant on the thresholds to make sure that the profit of the closely held company is distributed tax-efficient.
Proposal on new legislation
Recently, a new proposal has been presented with the purpose to simplify and improve the rules regarding the taxation of owners of closely held companies. The aim is to promote entrepreneurship and improve the conditions for small and medium-sized enterprises by proposing e.g. that the threshold amounts are increased. Another advantage of the proposals is to simplify the rules and reduce administrative burden for entrepreneurs.
The proposals are suggested to come into effect on January 1, 2026, and we will of course follow the updates on this proposal closely.
