Proposed new legislation could impose Swedish withholding taxes on redemptions for shareholders with limited tax liability

A proposal on new Swedish withholding tax legislation is one step closer to come in to force as the Swedish Government has decided to circulate the proposal to the Swedish Council on Legislation, which is one of the final preparatory steps in the Swedish legislations process. The implication of the proposed new legislation is that the taxation of redemption shares is moved from the time of redemption to the day when they can be disposed (e.g., sold) by the shareholders. This means that the allocation of redemption shares to the shareholders would in some cases be treated as a dividend. For foreign shareholders with limited tax liability in Sweden the implication of the new legislations would be a liability for Swedish withholding taxes already when receiving redemption shares. 

Background 

Swedish limited companies can reduce their share capital, through share repurchases and redemptions. A redemption procedure can be done through a share split with a subsequent mandatory redemption or through a transfer of redemption rights to the shareholders. For the latter option, each shareholder must notify whether they want to use their redemption rights to redeem existing shares. The shareholders also have the opportunity to sell their redemption rights. 

It is stated in the proposal for new legislation that the new regulation aims to increase the uniformity in the taxation of value transfers, such as redemption and repurchase, from limited companies to shareholders. The legislation will apply to shareholders with unlimited and limited tax liability.

Swedish shareholders - shareholders with unlimited tax liability 

Shareholders with unlimited tax liability are, according to current Swedish tax regulations, subject to capital gains taxation for payments on redemption and repurchase. According to the proposed legislation the allocation of redemption shares to shareholders would be treated as a dividend. The value of the dividend would amount to the compensation to be paid. The implications of the new regulations for shareholders with unlimited tax liability would therefore be that tax liability would occur earlier. The taxation of Swedish shareholders with unlimited tax liability should not increase due to the new legislation.

Foreign shareholders - shareholders with limited tax liability

Current regulations

According to current Swedish tax regulations, the Swedish Withholding Tax Act (1970:624), shareholders with limited tax liability in Sweden are subject to withholding taxes on dividends from Swedish limited companies. It is a definitive withholding tax of 30 percent on dividends. According to the tax regulations, the withholding taxes are also levied on repayment to shareholders in the event of a reduction in the share capital and payment to shareholders upon the company's acquisition of its own shares (i.e., payments on redemption and repurchase). 

If redemption shares or redemption rights are disposed of before redemption, the responsibility for the Swedish withholding taxes can be transferred to a third party, i.e., to the buyer of the redemption right. In such cases no withholding taxes are levied on the disposal because the compensation is not a dividend according to the Swedish tax regulations. Instead, the compensation is treated as a capital gain. The buyer of the redemption right has the option to apply for a refund of the levied withholding taxes to the extent the withholding tax relates to the acquisition cost of the redemption shares. Thus, withholding tax is only levied on the actual profit of the redemption.  

The proposed new regulation

The key element of the proposed legislation is that allocation of redemption shares to the shareholders will be treated as a dividend when limited companies reduce share capital through redemption or repurchase. The implications of the proposed new tax regulations for shareholders with limited tax liability are that Swedish withholding taxes will be levied already when redemption shares are allocated to the shareholders. This would mean that when a limited company reduces its share capital for repayment to the shareholders with withdrawal of shares, or through the limited company acquiring its own shares, the withholding taxes would be levied before any payment to the shareholders. 

According to the new legislation, the allocation of the shares would be treated as a dividend and therefore be subject to withholding taxes. An exemption would apply in cases where the allocation would be made in exchange for shares in the company. The basis for the withholding taxes would be the compensation to be paid to the shareholders when the shares are redeemed or acquired.

In addition, the proposed new legislation also includes regulations that would, in certain situations, repeal the shareholders current rights to apply for a refund of withholding taxes. It should also be noted that an additional change due to the new regulations would be that the payment made when the redemption shares are redeemed will not be considered a dividend, and not be subject to withholding taxes, because the withholding tax would already have been levied on the allocation of the redemption shares.

For withholding tax to be levied on the allocation of redemption rights to the shareholders, new regulation will be introduced in the Swedish Withholding Tax Act. The proposed new legislation entails that the scope of the current legislation will have to be extended. The changes are proposed to take effect on the 1st of January 2025 on redemption shares that are allocated to shareholders after the 31st of December 2024. For redemption shares that are allocated to shareholders before the 1st of January 2025, older regulations apply.

Comments from consultation bodies

The proposed new legislation has a purpose of creating a more uniform taxation of value transfers from limited companies to shareholders and should primarily have an impact on foreign shareholders and persons with limited tax liability in Sweden. The main implications will be increased taxation of foreign shareholders.

The proposed legislation has however been subject to criticism and it has been argued that the implications on transactions with business reasons should be further evaluated. It has also been highlighted that the reason why redemption shares are sold by shareholders with limited tax liability is to avoid the complicated handling of the application for refund of Swedish withholding taxes. According to current taxation rules, foreign shareholders have the opportunity to sell redemption rights and thus move the responsibility to pay Swedish withholding taxes to a third party. This way the heavy administrative burden to apply for refund can be avoided. Since taxation will, according to the proposed legislation, occur in connection with the allocation of the redemption rights, foreign shareholders will be subject to Swedish taxation even if the redemption rights would be disposed of to a third party. From the shareholder perspective the proposed legislation does not solve the issue of Swedish withholding taxes resulting in complicated refund processes. 

Critics have also brought forward that the allocation of redemption rights should not be taxed as a dividend, as the redemption rights do not always lead to a transfer of value. For example, the Swedish Central Securities Depository Euroclear argues, that the withholding tax levied on the allocation of the redemption shares may create increased financial risks for the company. The increased risk is deemed to lead to Euroclear no longer being able to provide services for the allocation of redemption shares in connection with a split, bonus issue or any other corporate events that may result in taxation under the proposed regulations. According to Euroclear, the proposal creates practical challenges and could have consequences that have not yet been anticipated. Euroclear also believes that the terminology of the legislation is still unclear, may be difficult to apply in practice and could lead to difficulties in interpretation. 

Deloitte’s comments

In summary, the proposal can be perceived as contributing to a more equal taxation for the various approaches that can be applied in connection with share repurchase and redemptions. It is however difficult to assess if the new legislation will create practical challenges or lead to interpretation difficulties in the future, as indicated by certain consultation bodies.

Authors

Paulina Ceylan

Karoliina Joas