According to an advance ruling from the Council for Advanced Tax Rulings, Board fees are to be taxed as income from employment. Only in exceptional cases can Board work be executed via a company, provided that the assignment is limited in time and scope.
The issue in the advance ruling referred to whether Board fees comprise employment income, for which the Board members are to be taxed, or if it comprises income from business operations, which is taxed in a company. Board assignments are executed on a consulting basis via one of Board member’s wholly owned limited liability companies, which invoices the principals for the executed Board work. The consulting agreement applies until further notice, one year at a time, and the principals subscribe to the requisite professional indemnity insurance. Eight out of nine Board assignments are executed by companies owned, by approximately 2-24 percent, by a Board member. This ownership can be direct or indirect.
The Tax Agency is of the opinion that if there are, on an ongoing basis, at least three Board assignments, the Board fees for the work involved can comprise income from business operations on the premise that the assignments do not refer to the member’s own company or to an associated company.
According to legal practice, in principle, there has been no hinder to a limited liability company undertaking operations which are primarily based on the owner’s personal work activities. However, one exception has been that the Board fees have been seen to comprise income from employment as the assignment granted to the Board member is personal and is executed by a natural person (Supreme Administrative Court’s Yearbook, 1993 ref 104). This exception has applied except in certain, specific cases in which the Board work was limited in time and referred to a special assignment, that is, it was limited in scope (Supreme Administrative Court’s Yearbook, 1993 ref 55.)
Business operations comprise of operations for gainful employment which are undertaken on a professional and independent basis. A change in the law in 2009 expanded the requirement of independence implying that special consideration is to be given as to what is agreed upon with the principal, the scope to which the entity providing the services is dependent on the principal and the degree to which the entity providing the services is integrated with the operations of the principal. In addition, the parties’ intention to enter into an engagement agreement and the terms governing the assignment were assigned increased importance in making an assessment of such independence. The Government’s intention was that a larger number of Board members’ services would be deemed to comprise business operations.
A majority of the Council on Advance Tax Rulings’ members believe that the change in the law does not change the personal nature of the Board assignment. Neither has any change taken place in the regulations of the Swedish Companies Act regarding the companies’ management and the Board members’ responsibilities. Consequently, the previous practice, that the Board fees are to be taxed as income from employment, continues, according to the Council, to apply. As the Board assignments in question are not limited in time and do not refer to a specially limited assignment, the Council believed that the Board fees in the advance ruling in question are to be taxed as income from employment.
Of the Council’s seven members, three dissented. These members believe that developments in society and in the law, since the Supreme Administrative Court’s decisions in 1993, argue for a greater acceptance of personal assignments executed via companies. They emphasise that the Government’s aim with the expansion of the requirement of independence was also to increase the predictability between the principals and the entities supplying the services. In other words, when two parties have entered into an engagement agreement, the starting point should be that the agreement applies.
With some degree of surprise, we note that a majority of the Council’s members did not take the opportunity to include Board work in the expansion of the requirement of independence. The Council does not refer to the fact that the Board member owned a portion of a number of companies as a motivation for taxing the Board fees as income from employment, but, instead, would appear to have based their conclusion on previous legal practice. With this approach, it could reasonably have been the same result even if the applicant in the advance ruling had not owned any portion of the companies. However, it cannot be entirely excluded that ownership could have impacted this ruling.
The Tax Agency has appealed the advance ruling. We look forward to the Highest Supreme Administrative Court’s testing of and clarification regarding this matter.
You are most welcome to contact us if you require guidance in handling this question regarding Board fees.
Authors: Anna-Sara Lindström and Henrik Olofsson, former employees at PwC.
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