New decision on the outsider rule

PwC-skatteradgivning-Group-outline_0002_burgundy ‹ Back to the articles

PwC-skatteradgivning-Group-outline_0002_burgundyAccording to the so-called 3:12 regulations, a part owner in a closely held company can be taxed on dividends/capital gains both as income from services and as income from capital. An exception to this major rule, where applicable, is the outsider rule. The Supreme Administrative Court has recently made a decision in an advance ruling in which the major issue was whether it is the actual ownership share or the economic outcome of the ownership which is to be seen to be decisive in determining the application of the outsider rule.

The Supreme Administrative Court’s (HFD’s) decision applied to person A owning shares in closely held company, X AB. A is operative to a significant degree in X AB, In addition to A, there are other part owners who are also working to a significant degree in X AB. Totally, the operative part owners own approximately 90 percent of all of the shares in X AB. The remaining approximately 10 percent of the shares in X AB are owned by passive part owners.

Shares in X AB are comprised, partly, of ordinary shares and, partly, of preference shares. The holders of preference shares have, amongst other things, preference as regards any dividends in the form of a fixed amount per share. In this case, the passive part owners owned a relatively large portion of the preference shares. As a result of these holdings, the passive part owners have received, to date, more than 30 percent of the determined dividends paid out by the company (even if they have owned only 10 percent of the shares).

Due to the passive part owners receiving such a large portion of the dividends, A was of the opinion that the outsider rule was applicable and approached the Council for Advance Tax Rulings for a clear decision in this issue. The Council did not agree with A’s assessment.

HFD was, then, to test the issue of whether the outsider rule can apply when an external part owner owns significantly less than 30 percent of the shares in a closely held company but receives more than 30 percent of total dividends. HFD concluded, briefly speaking, that it is the ownership portion and not the economic effects of the ownership portion that is decisive in assessing whether the outsider rule is to apply. HFD adopted, thereby, the Council for Advance Tax Ruling’s assessment that the outsider rule did not apply and that A’s dividends and capital gains from X AB were to be taxed in the usual manner according to the 3:12 rules.

Comments

The actual case is in line with previous practice and confirms that it is the shareholding and not the economic outcome which is decisive in applying the outsider rule in these types of situations.

Do you have any questions on entrepreneur and SME Taxes?

Andreas Stranne och Maria Wettersten

Andreas Stranne och Maria Wettersten

Andreas Stranne och Maria Wettersten arbetar på PwC:s kontor i Göteborg respektive Jönköping. Båda arbetar som skatterådgivare för entreprenörer och deras bolag.
Andreas: 010-213 14 47, andreas.stranne@pwc.com
Maria: 010-212 56 77, maria.wettersten@pwc.com
Andreas Stranne and Maria Wettersten works at PwC’s office in Gothenburg and Jönköping and specialises in tax-related issues concerning entrepreneurial companies and their owners. Andreas: +46 10 213 14 47, andreas.stranne@pwc.com
Maria: +46 10 212 56 77, maria.wettersten@pwc.com

Leave a comment

Related articles

Read the article

Summer greetings from Mikael Carlén

This spring, PwC has conducted the annual survey, “Skattebarometern 2019”, on attitudes to taxes and the tax system. The objective is to ...

Read the article
Read the article

Mikael Carlén wishes you Happy Holidays!

2018 has been an exiting year, with the election in Sweden and Brexit being subjects of much discussion. As regards tax proposals, there ...

Read the article
Read the article

Mikael Carlén wishes you a nice summer!

The spring has been eventful, with the Tax Agency’s proposal for a new ”exit tax” and the 2018 election being the two most discussed ...

Read the article