The solution to tax problems when
a new generation takes over a closed Company?
The so called 3:12 rules means, in short, that if an active partner in a close company is subject to special tax rules regarding dividend and capital gain; taxation is split between capital gains tax (20-30% tax rate) and income tax (up to 58% marginal tax rate). If the partner ceases to be active in the close company, the shares cease to be subject to the 3: 12-rules after five years, according to the five year qualifying period.
Sales of close companies are usually done through internal share transfer, where the profit ends up tax-free in a company owned by the seller. Five years after the sale of the business, the profit can be, if managed correctly, taken out with 25% capital gains tax. However, as a result of a number of rulings from the Supreme Administrative Court of Sweden in 2010, close companies that want to hand over the operation to the next generation are in a worse tax position compared to close companies selling their business to an external party. The fact that the operation is continued by a relative to the seller means that the five year qualifying period does not start until the relative ceases to be active in the company, so it takes longer before the profit can be taken out at a 25% tax rate.
Two advance notices from the Tax Board in July 2014 indicate a solution might be materialising soon. The advance notices are in reference to repeated share transfers with the purpose of starting the five year qualifying period for the profits remaining in the company after the sale of the business. A similar procedure had previously been rejected as tax evasion. One major difference is that in the previous case the five year qualifying period was circumvented; profits were directly subject to the 25% tax rate. Although the majority of the Tax Board did consider the cases under consideration as tax evasion, several of Board Members dissented and did not believe the tax evasion law should be applied because the practice maintained the five year qualifying period and could not be considered inconsistent with the purpose of 3:12 rules.
The advanced notices have been appealed to the Supreme Administrative Court of Sweden and could possibly result in generational shifts not being taxed harder than sale to an external part.Setterwall’s webbsite