Proposal for amended Swedish tax legislation for real property transactions
Swedish tax legislation for real property transactions
On March 30, the special appointed Committee presented its proposal for amended Swedish tax legislation for real property transactions.
On March 30, the special appointed Committee presented its proposal for amended Swedish tax legislation for real property transactions. Current beneficial tax rules applicable to the sale of real property into and via companies has been a topic of discussion for a long time. The Committee instruction was to change these rules and to minimize tax planning opportunities at sale of real property. The proposal includes a major tax increase for the real property market should it be introduced.
In brief, the Committee is proposing:
- Sale of shares in a Swedish property company (as defined under the proposal) where the transferor loses control over the property company would trigger capital gains taxation for the property company on the difference between the property’s tax base value and the fair market value. The gain would be taxed at the standard corporate tax rate at 22%. Please note that it would be the property company that would be subject to tax and not the transferor of the shares. Consequently, the property company would receive a step up of the tax base value which could be used for tax depreciation purposes. In essence, the proposal thus mean that the sale of a qualifying property company should be treated equally to a direct sale of the property.
- Under the proposal, the current investments will not be grandfathered, i.e. if the proposal would become law it would affect current property structures.
- The sale of shares in property companies is currently exempted from stamp duty. The Committee is proposing an extra income tax that would be triggered at the sale of a real property company equaling the stamp duty (i.e. a taxable fictitious income of 7.09% of the property’s fair market value). Also here the taxable entity would be the property company.
- Stamp duty for certain legal entities such as limited liability companies would be lowered to 2% from 4.25%. Intra-group transfers of real property would be exempted.
- Stamp duty on property reallotment and partition, which currently is exempted, would be introduced.
- The Committee is proposing that the new rules would apply as from 1 July 2018. The date of binding agreement for a sale is decisive for whether the new rules should apply or not.
Please note it is a proposal by a committee only, and as such it is not certain to become law. Although only a proposal, we have seen effects on the market and a buyer would already most likely ask for a significant increase in discount for deferred tax at an acquisition of a Swedish property company.
The Swedish Ministry of Finance has communicated that the proposal will not be a part of the autumn budget. Based on this the proposal date for entry into force is questionable. The Ministry of Finance has, however, circulated the proposal for formal consultation. Parties other than appointed consultation bodies may provide their views on the proposal and the deadline for comments is August 14, 2017.
The Committee’s proposal is rather controversial in many aspects. For example it proposes that all deferred tax should be brought to taxation at the sale of a property company without introducing any grand fathering provisions or transitional rules. This part will most likely meet heavy criticism since it would be a form of retroactive taxation that could be very burdensome for many real property investors. Also, minority shareholders could indirectly be targeted even if they have not been involved or have had any control over the transaction that triggers the tax liability which likely also will be criticized.
After the consultation period, the Ministry of Finance will present its proposal, which could be different from the Committee’s. It will likely be coordinated with the new rules on interest deductions, that must be implemented as a consequence of the Anti Tax Avoidance Directive, and which are also very important for the real estate sector.
You are very welcome to contact us if you have any questions on what this could mean for your business.
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