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The Sweden-Austria tax treaty scandal.
by Peter Sundgren


At a meeting in February 2007 arranged by the Swedish IFA branch and hosted  by Deloitte, Stockholm, representatives from the international office of the Swedish Finance Department, Mrs. Ingela Willfors and Mr. Claes Hammarstedt, had been invited to give information about the present situation regarding Sweden’s tax treaty network and other related international tax matters.


When the discussion turned to the Sweden-Austria treaty and the recent  developments thereof  I  probably spoiled the agreeable atmosphere of the meeting by  venting my serious grievances regarding the Finance Department’s deplorable mismanagement of this treaty.


My frustration was based on the recent findings of a Tax Administration report (Skatteverket, “Slutrapport – FÅAB Österrike” diarienummer 112 797381-06/121, 2006-12-20 authored by Johan Thim).The conclusion that can be drawn there from is that Sweden’s lethargic and comatose attention to this treaty regarding the taxation of share gains derived by entrepreneurs moving to Austria has given rise to a shortfall of taxes over the last fifteen (!) – I repeat 15 - years of maybe 8-10 billion SEK. The Tax Administration investigation has covered fiscal years 2000-2005. For the period 2003-2005 the tax loss is assessed at 1 billion SEK. According to Mr. Thim’s article in IUR-INFORMATION 7/2006 the shortfall of tax for 2000-2005 is 3 billion SEK. The investigation does thus not cover the period 1992-1999 nor 2006. It is understood, however, that in the late 90s during the dotcom boom  a number of very substantial capital gains, some of them reported at hundreds of millions of SEK, were harvested in Austria, (who of course must have been delighted to welcome such a lot of rich entrepreneurs to their country.) No doubt attractive too has been Austria’s  strict bank secrecy rules.


For those who are not familiar with Sweden’s Public Finances the above reported tax losses equal almost a quarter of the Swedish Defense Budget! The amount of expatriated capital should be around 30 billion SEK. And this only represents what has gone down the drain in one single loophole of one separate tax treaty![1] As shall be described below, however, this probably represents only the tip of the iceberg.  I emphatically concluded that as a resident (senior) citizen and  tax payer of Sweden I was appalled by this massive squandering of tax payers’ money. To ordinary tax payers who stoically and loyally shoulder what they many times consider a very heavy burden of single taxation, a tax agreement with a foreign nation providing completely tax free income is considered  intolerably unfair and seriously undermines the respect and integrity of the  tax system in general and of tax treaties in particular.


Since at least the mid 90s I have several times in various periodicals submitted reports about the Austrian capital gains situation and my fears that this was giving rise to serious tax base losses. All of these reports seem to have served as nothing but material for paper-swallows to our treaty negotiators.


As much as I welcomed the new protocol of the Sweden-Austria treaty which now in record time has been negotiated, initialed, translated, signed, submitted to various institutions (including, which has never occurred in the past, even the Law Council of the Supreme Courts, (Lagrådet)) for comments, approved by Parliament, ratified and made effective as of 1 January 2007[2] and has bandaged the bloodletting, the main objective is now to imprint upon the Government  the importance of  learning from this experience to prevent further damage to the Swedish treasury. Our treaty negotiators, however, at the meeting showed no sense of urgency in these matters.


This whole affair confirms my long held view that Swedish international tax and tax treaty policies are mainly reactive and not strategic. Only when ‘all hell breaks loose’, generally in the medias, is there a reaction from the tax legislator or treaty negotiator. (This is a matter which I will deal with more comprehensively in my forthcoming international tax ‘memoirs’ in this journal.)


As indicated above Austria is not the only trouble spot as far as exiled capital gains are concerned. According to the Tax Administration report the problems of capital gains being transferred abroad by emigrating shareholders is a well known phenomenon. International tax practitioners in Sweden generate vast amounts of fees orchestrating these tax arrangements. Consequently,  the focus of interest in these matters is now shifting, it is rumoured, to countries like for instance Slovenia, Croatia and the Greece which have no or very low rates of capital gains taxation and which also have tax treaties with Sweden similar to that between Sweden and Austria. Also, which will be discussed below, indirect holding company strategies are also used to a great extent to avoid Swedish tax on exiled capital gains.


It is therefore necessary, in these times of ruthless and rampant international tax planning, to adopt more imaginative and pro-active measures. One such measure, it is suggested, is to give notice of termination or suspension of operation – not (necessarily) of the whole of these treaties – but only of the capital gains tax article to the extent that it applies to such share alienations that are taxable under our domestic laws.


However, article 44 of the Vienna Convention on the Law of Treaties regarding the separability of treaty provisions regarding “the right of a party to denounce, withdraw from or suspend the operation of a treaty may be exercised only with respect to the whole treaty unless the treaty otherwise provides or the parties otherwise agree”. Therefore, and as tax treaties generally lack any rules on the separability of treaty provisions, it seems that such partial suspension of the capital gains tax article as just suggested  can be achieved only upon an agreement with the other contracting state. Such an agreement in cases like this should, however, not be so difficult to reach. Also, subject to subsequent ratification, they should  be possible to put into effect with short notice as was demonstrated in the new Sweden-Austria protocol.


Moreover, and as a first and urgent step, one would at least consider it appropriate to conduct an analysis of our treaty network in order to determine which countries that are ‘at risk’ regarding exiled capital gains. There is, however, no evidence that any such initiative has been contemplated. Therefore, in a forthcoming issue of this webb-journal, such an investigation will be undertaken.


‘Box-company’ structures


As mentioned above, a further problem regarding exiled capital gains, which has bedeviled the Swedish tax legislator for a long time, are such cases where tax has been avoided by first ‘encasing’  the Swedish (target) company free of tax as a subsidiary under a foreign holding company set up by the same shareholder and subsequently, after moving abroad, selling the holding company. The reason why tax is avoided in these situations is that Swedish tax liability under our domestic 10-year rule on migrating shareholders, only applies to the sale of Swedish securities.


This type of maneuver, however, was finally stopped by the introduction a number of years ago, by a  provision whereby the sale of the shares of a Swedish company to a foreign holding company was deemed to have taken place for tax purposes at market value.


Being a member state of the European Community with its strict enforcement of the principle of free movement of Community residents this Swedish legislation was, however, disqualified by the Luxembourg Court (and confirmed in RÅ 2002 not 210). The above mentioned box-company structures involving EU Member State holding companies thus still remain useful instruments for avoiding Swedish capital gains taxation.


Subsequently a commission appointed by the Swedish Government (and chaired by professor Peter Melz) looked into these matters and issued a report, SOU 2005:99. It concluded that Sweden has a valid claim to tax capital gains of this nature in order to preserve its principle of double taxation of company profits but comes nevertheless and somewhat despairingly to the result that nothing can be done about the ‘problem’ of  the overriding EU principles of equal treatment of Member State companies and the free movement of individuals.


But maybe SOU 2005:99 stopped one step short of its goal! And maybe by a combination of the measures contemplated by the Melz commission the following (draft) suggestion can uphold Swedish tax claims also at a ‘European Union level’, i.e. a suggestion which is not in conflict with EU principles: The following proposal should thus be contemplated:


  1. All transfers of substantial holdings (as defined) of Swedish shares by individual shareholders to both Swedish and EU holding companies should be deemed for tax purposes to have occurred at market value.
  2. The tax hereon shall, however be deferred until a sale takes place of the holding company.
  3. The charge of the deferred tax amount shall , however, by the introduction of a ‘reversed credit mechanism’, be reduced by any Swedish or other EU tax imposed on the shareholder on the sale of the holding company.
  4. In order to thwart a circumvention of the above construction by allowing the holding company to dispose of its Swedish subsidiary and subsequently distributing the profit as a dividend to its shareholder, 30 percent of the dividend (representing the present Swedish tax on such dividend receipts) shall be payable of the deferred tax from the (previous) sale of the Swedish company to the holding company. Again, however, this tax charge shall be reduced by any EU tax  incurred by the shareholder on the receipt of the dividend. 
  5. All Swedish tax remaining from the original deferral shall be waived after a period of ten years (corresponding to the present ten year (quarantine) rule).


This construction, it is suggested, maintains equal treatment of all EU individual shareholders and EU companies and should not interfere with tax treaty obligations.


It must be underlined that this suggestion only represent a preliminary and superficially explored idea which no doubt requires further study. Pitfalls and problems may have been overlooked. The construction is no doubt of a complex nature and presents difficulties for tax administration monitoring. It must be remembered, however, that the tax strategies to be thwarted are in themselves very complicated. And the monitoring of international operations and cross-border transactions is always a problem. This, as a matter of fact, applies also to the ten year rule itself. Most important, however, is to construe legislation that puts a stop to unwarranted tax planning efforts of responsible international tax practitioners.


Pretended transfers of residence


A further problem regarding exiled capital gains and one which indeed the authors of the OECD Model Convention, (under subsection 9 of the Commentaries to article 1, dealing with “Improper use of the Convention”,) have recognized is when “an individual who has in a Contracting State both his permanent home and all his economic interests, including a substantial shareholding in a company of that State, and who, essentially in order to sell the shares and escape taxation in that State on the capital gains from the alienation (by virtue of paragraph 4 of Article 13), transfers his permanent home to the other Contracting State, where such gains are subject to little or no tax”. However, no remedies against such improper use of the convention are offered.


And in its report above, the Tax Administration complains about the problems in practice of establishing whether or not the transfer of residence of the pertinent shareholder is definite or ‘true’ or only a paper fabrication. Also, which I can testify to from my own experience, it will frequently occur that the shareholder will choose to return to Sweden after only a short sojourn  subsequent to the collection of his tax free capital gain. In an article in Svensk Skattetidning in 1999 (pages 678-682), and with the purpose of thwarting the above mentioned types of fabricated moves abroad by shareholders, I recommended the introduction of a “catch-back clause” subjecting to Swedish tax any capital gains that had been derived abroad by a shareholder who after having left Sweden returned within (say) a five year period. A credit would of course be given for whatever tax had been imposed abroad on the alienation of  the shares. The UK has legislation of this nature. This type of rule has also been endorsed by the Federation of Swedish Industries in their reactions to an official  Commission report suggesting new tax residence rules for individuals. The idea – and I cannot explain why I was not surprised - together with all other recommendations in the Commission report have also been shelved by the Government.


In order to facilitate comments on the above suggestions, all of which will be most welcome, I shall put this report also on my recently established blog at www.blogger.com. Search for “Peter Sundgren on International Taxation”.


In the next edition of Skattenytt Johan Thim will be presenting a recommendation that Sweden emulate the new German exit-taxation rules to counteract exiled capital gains tax strategies. His ideas are well worth considering.


The Institute of Foreign Law www.iur.se has announced the arrangement in late May of a very high-profiled international tax meeting in Stockholm focusing particularly on tax treaties. Invited speakers are Jeffrey Owens, head of the Centre for Tax Policies and Administration of the OECD, Vito Tanzi, Director of the Inter-American Development Bank and no less than three past and present chief Swedish tax treaty negotiators, Supreme Administrative Court Judge Stefan Ersson, Tax Director at Skatteverket Roland Gustafson and Treasury Counsel and assistant head of the unit for Tax Administration, Tax Treaties and Customs at the Finance Department Ingela Willfors. This should provide a golden opportunity to discuss the tax matters dealt with in this report.




It is now 23 years since the Swedish Government (in 1984) was instructed to vigorously revamp our tax treaties in order to preserve Swedish tax claims on exiled Swedish share gains. Misguided priorities has, it is suggested, still prevented this task from being completed. (A new tax treaty with Ghana, which is presently under negotiation, cannot, with all respect, be that important!)  It is also clear that our tax treaty making function has been seriously under-financed and under-staffed. This has cost, and is still costing, Swedish (resident) tax payers thousands of millions of kronas.


The situation regarding foreign share gains and box-company strategies may yet be able to solve. Perhaps, therefore, it is not necessary, as we say in Sweden, to “throw the axe into the lake”!

Stockholm April 2007





[1] For a comprehensive description of the history of the Sweden-Austria treaty ,see my report at www.skatter.se

[2] The result of the new rule includes a spectacular new principle for avoiding double taxation under which the tax base is split, allowing Sweden to tax the appreciation of the shares up until expatriation of the shareholder from Sweden and Austria taxing whatever gain that may occur thereafter.