Swedish proposal on exit taxation07 February 2018
When a person leaves a country, the country of exit is usually prohibited from taxing the person’s future foreign income. Consequently, a good deal of European countries have passed exit taxation regulations, according to which hidden reserves are to be disclosed and taxed upon exit. Recently, the Swedish Tax Agency presented a proposal to the Ministry of Finance introducing provisions for exit taxation of physical persons. This article intends to outline the proposal and the debate it has caused.
In its current form, the proposal applies to individuals who have resided in Sweden during five of the last ten years and move from Sweden with unrealized net gains on capital assets. Capital gains of less than 100,000 SEK are, however, not covered by the proposal. Furthermore, assets in investment savings accounts, assets in business activities and real property are not covered by the proposed regulation. The proposal primarily covers shares and partnerships.
The proposed tax means that capital assets are to be treated as if they had been sold upon exit of their owner. The unrealized net gain is thereby treated as if it had been realized, and is subject to capital gains tax (generally 30 %, but exemptions may be applicable).
Moves within the EEA or to countries with which Sweden has tax agreements allow for a deferral in paying the tax until the capital asset is sold, and the gains actually realized. The deferral has to be renewed yearly by the tax subject, who is obligated to prove that he or she still owns the capital assets which have been granted the deferral.
For non-EEA countries, the deferral is limited to a maximum of five years, after which the tax has to be paid regardless of whether the assets have been sold or not.
According to calculations by the Swedish Tax Agency, the new tax is expected to affect between 1,000-2,000 tax payers yearly and should bring in 1 billion SEK per year. However, a study performed by auditing firm PwC has shown that the proposed tax may instead have the opposite effect and cause a net loss of tax income. The Swedish Tax Agency’s calculations are based on the assumption that the mere top five tax payers will account for roughly half the expected income from the new tax. The capital gains of the top five tax payers affected by the tax vary wildly from year to year, which the Swedish Tax Agency’s calculations also confirm. Between 2015 and 2016, an increase in capital gains of 114 % within the top five tax payers affected by the tax was noted. Thus, the proposal would only work as calculated by the Swedish Tax Agency on the presumption that there were no changes in behaviour on the part of the top tax payers affected by the tax.
However, should a few of the largest tax payers leave Sweden before the new tax comes into effect, it might end up causing a net loss for Swedish tax incomes. Certain critics also believe that the new tax will also make it harder for start-ups to recruit competitively in the global market.
The proposal is rather timely, having been presented at a time in which many Western countries are fighting tooth and nail to secure their tax bases. In light of that, it is likely that the proposal will pass in one form or another. However, it remains to be seen whether an exit tax in any form will do more harm than good for the Swedish tax base.
For more information, contact:
Egon Micevic, Advokat & Associate
Flood Herslow Holme Advokatbyrå, Malmö
t: +46 40 10 14 60