Sweden: Taxation of restricted share grants to employees
On December 30, 2009, the Supreme Administrative Court (SAC) of Sweden issued a ruling that will help clarify the point at which restricted shares will be subject to income taxation in Sweden. In the case before the SAC, legal ownership of restricted shares had been transferred to the employees at the date of grant. However, the shares had restrictions on the employees' ability to dispose of the shares and a mandate that each employee must return their shares without consideration if the employee was terminated within a certain period of time. The Supreme Administrative Court (SAC) of Sweden concluded that these restrictions did not defer Swedish taxation past the point at which the employee took legal ownership of the shares.Swedish taxation of restricted shares
Swedish legislation states that an individual who "acquires" shares for a price below the fair market value (FMV) of those shares will be subject to Swedish tax on the difference between FMV at the time of acquisition and any price paid by the employee to acquire the shares. The taxable gain realized at acquisition will be treated as employment income, and any subsequent appreciation in the value of the shares will be treated as capital gains. However, there has been some uncertainty regarding how the term "acquisition" should be interpreted for purposes of employment income taxation and, consequently, when an employee's equity award will be subject to tax.
Employment income in Sweden is subject to municipal tax at rates up to 35% and state tax at rates up to 25%; employees are therefore liable for Swedish income tax on employment income at a combined rate of up to 60%. Capital gains are subject to tax at a rate of 30% (25% for unlisted shares). As such, assuming that the value of the employer's stock will rise, employees are generally better off paying employment income tax as soon as possible, when the shares may be at a lower value, and capital gains tax on any subsequent appreciation. Nevertheless, the imposition of employment income taxation before the underlying shares can be disposed of carries a risk that the employee will pay tax on shares that may never provide any economic benefit for the employee. Additionally, if the value of the underlying shares decreases between the time of taxation and the time when the shares can be disposed of, the employee's capital loss upon disposition can only be used to offset capital gains (taxed at a maximum rate of 30%), and not ordinary employment income (taxed at a maximum combined rate of 60%).
As mentioned above, there has been uncertainty in Sweden with respect to when shares are deemed to be "acquired," and therefore subject to employment income tax. Nevertheless, restricted shares have generally been considered to be subject to tax at vesting, when all disposal/forfeiture restrictions have been lifted, even in the case of restricted shares that bestow dividend and voting rights on the employee at grant.Supreme Administrative Court (SAC) ruling
The facts presented before the SAC were such that, as part of an incentive program, after fulfillment of certain financial performance goals, officers of a company were to be granted a set number of shares of the publicly-traded parent company, without cost to the employees. The shares would be transferred to each employee's brokerage account at the time of grant and, upon completion of the transfer, the employee was immediately entitled to dividend and voting rights with respect to these shares.
However, even though the employees had dividend and voting rights from the date of grant, they could not transfer or in any other way dispose of the shares received before the end of the second calendar year after the year in which the shares were transferred to their brokerage account ("forfeiture period"). Additionally, if an employee ceased to be employed by the company at any time during the forfeiture period he would be required to return the distributed shares without any consideration. The question arose as to whether, considering the restrictions on disposal, the restricted shares could be considered acquired, and therefore subject to employment income tax, when deposited in an employee's brokerage account? If not, should employment income taxation be deferred until the end of the forfeiture period?
The Supreme Administrative Court (SAC) of Sweden ruled that the restrictions that applied during the forfeiture period should not defer the point of employment income taxation with respect to the restricted shares at issue. As such, the restricted shares should be taxed as employment income (and subject to employer social security charges) at the time when the shares are transferred to the employee's brokerage account, and any appreciation thereafter will be deemed capital gains upon sale.
It is important to note that the SAC ruling is an advance tax ruling where the applicant seeks a ruling regarding the tax consequences of the questions presented, and only the specific facts and questions addressed are subject to the ruling. As a result, it is unlikely that the ruling would be applicable to other types of share settled equity awards, such as restricted stock units (RSUs); however, it is important for companies to seek professional guidance to determine what applicability, if any, the SAC ruling will have on their share plan(s).
The Swedish Tax Agency has communicated that they will review the Court's ruling in order to determine whether they believe there is any need to amend existing tax legislation.Action
- Companies granting restricted stock awards to employees in Sweden should consult with their tax advisors to confirm the point at which employment income taxation will arise.
- Employers should review their payroll systems to ensure that withholding of employment income tax, as well as the employee pension fee (7% in 2010), is operated in line with the time that the liability to employment income tax arises.
- Employers should consider communicating this ruling, and its impact, to employees.