Sweden Tax: Swedish Tax Agency proposes amendments to CFC legislation

The Swedish Tax Agency has issued a proposal to amend Sweden's CFC legislation. The purpose of the amendment is for the CFC legislation to apply to low-taxed income from the leasing of patents, licenses, trademarks and similar rights in certain cases. The Ministry of Finance must now decide whether the government should issue an official proposal.

According to the Swedish Income Tax Act, a Swedish resident company or individual, as well as any nonresident with a permanent establishment in Sweden, with a holding in a low-taxed foreign legal entity (CFC) is liable to Swedish tax on its share of the worldwide net profits of the foreign legal entity. The income of the foreign legal entity is not regarded as low-taxed if one of the following requirements is met.

- The income, calculated according to Swedish tax rules, is taxed at a rate of at least approximately 14.5%.
- The foreign legal entity is resident in a jurisdiction that is regarded as having an acceptable level of taxation and therefore mentioned on the so-called white list. However, for companies resident in a white-listed jurisdiction, certain types of income could still trigger CFC taxation.
- The foreign legal entity is actually established and carries on genuine economic activities in an EEA jurisdiction.

Under current CFC legislation, a company within the EEA can normally be regarded as low-taxed only if it carries on low-taxed intra-group financing or insurance activities. However, the Tax Agency proposes that external financing and insurance activities should also be covered by the CFC rules.

The Tax Agency has also reviewed the tax rules of a number of jurisdictions (within and outside of the EEA) and identified countries which should be removed from the white list due to having a too low corporate income tax rate.

Further, the Tax Agency proposes that income from leasing of patents and other intangible assets in relation to certain jurisdictions which have a beneficial tax regime for such income should trigger CFC taxation in Sweden even if the country is on the white list. This could be the case for countries such as Belgium, Cyprus, Ireland, Luxembourg, the Netherlands and Switzerland.

It is important to note that this is a proposal from the Swedish tax authority and not the Ministry of Finance. However, it is likely that some changes to the current Controlled Foreign Corporation rules will be proposed by the Ministry of Finance although no such proposal has yet been published. Ernst & Young will monitor the situation and issue additional tax alerts as new developments occur. Ernst & Young LLP, Nordic Tax Desk – Carl Pihlgren (New York) / Ernst & Young AB – Erik Hultman and Rikard Ström (Stockholm)