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New Tax Rules for Investment Funds
The Swedish government has presented a bill on new tax rules for investment funds and their unit holders. The rules have been presented as a reaction to the UCITS IV directive, as the government fears that Swedish investment funds will transfer their business to jurisdictions with lower taxation.
Swedish investment funds will, according to the proposal not be subject to Swedish income tax. This tax exemption, should, according to the proposal, be compensated by the unit holders being taxed on a notional income based on the fair market value of the units at the beginning of the calendar year. The new rules will, if enacted, would apply from 1 January 2012. Taxand Sweden discusses the likely impact of the new bill on investment funds and unit holders based in Sweden.
According to the bill, foreign investment funds will be exempt from Swedish dividend withholding tax. The tax exemption will apply to funds covered by the Swedish Investment Funds Act (the SIFA) which are residents within the EEA or a state with which Sweden has concluded a tax treaty or a tax information exchange agreement.
Taxation of Swedish investment funds
Swedish investment funds are not taxed on capital gains on shares and similar financial instruments. Capital losses on shares and similar instruments are accordingly non-deductible. The tax exemption for capital gains is compensated by a notional income of 1.5 per cent calculated on the fair market value at the beginning of the year of such instruments. Other income for example, interest and dividends are taxable at a rate of 30 per cent. Interest expenses and dividend payments etc may be deducted.
Dividend distributions to unit holders are deductible for Swedish investment funds. Normally such funds distribute an amount equal to their taxable income, which means that they in practice would not pay any Swedish income tax.
Taxation of Swedish unit holders
Swedish unit holders are taxed on dividend distributions from Swedish as well as foreign investment funds. Capital gains on units in a Swedish or foreign investment fund are taxable whereas losses may be deducted. Special rules apply in case the units are held as stock.
Taxation of foreign investment funds
Foreign investment funds are generally subject to Swedish dividend withholding tax (DWT) at a rate of 30 per cent. The rate may be reduced under an applicable double tax treaty.
The proposed legislation
The bill proposes that the Swedish investment funds would not be subject to Swedish income tax. Unit holders, who are resident in Sweden for tax purposes, will instead be taxed on a notional income of 0.4 per cent. The notional income will be calculated on the value of units held in Swedish investment funds and comparable foreign undertakings, at the beginning of the calendar year. The unit holders will be taxed on dividend distributions from investment funds and capital gains on units in an investment fund as before.
According to the legal bill foreign investment funds will be exempt from Swedish dividend withholding tax. The tax exemption will apply to funds covered by SIFA resident within the EEA or a state with which Sweden has concluded a tax treaty or a tax information exchange agreement. The rules will in principle cover foreign undertakings that are comparable to UCITS.
The purpose of the draft legislation is to avoid an erosion of the Swedish tax base by exempting Swedish investment funds from income tax.
The notional income shall, according to the bill, compensate for the tax exemption at the level of the fund. The Swedish tax revenue will consequently not be reduced, but only be transferred from the investment funds to their unit holders. It should be noted that Swedish residents, holding units in foreign undertakings that are not comparable to Swedish investment funds, will not be taxed on a notional income. The new rules will consequently favour investments through foreign undertakings that are not comparable to Swedish investment funds.
Swedish investment funds will not be able to avail credit of foreign taxes and generally will not be entitled to tax treaty benefits due to their tax exempt status. Swedish investment funds should consequently consider alternative investment structures and apply for an exemption from foreign DWT on the basis of EU law.
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