Closely held companies and the third-party rule

In the preliminary ruling, the applicants wanted to know whether the third-party rule could be applied on shares held in a closely held company. In short, the third-party rule stipulates that if at least 30% of the shares in a closely held company are held by a third party, i.e., someone not closely related or associated with the owner, the shares held by the owner should only be qualified if there are special reasons. If the shares are qualified, dividends and capital gains on such shares must be split and allocated as both salary income and capital income (at different tax rates).

The reasoning behind the third-party rule is that, if someone not closely related or associated to the owner owns at least 30% of the total shares, the risk of any “work related income” being converted to capital income is deemed lower. However, the purpose of the “special reasons” rule is to prevent any circumvention of the third-party rule, where certain circumstances may lead to tax benefits in the form of converted income, even where the ownership of the company should prevent it.

In the case in question, the owners had entered into a shareholder’s agreement, according to which certain limitations were set in relation to the salaries and bonuses of the applicants. In addition, the shares in the company were split into two different share classes, voting shares held by the applicants and non-voting shares held by the external third party. As such, the Swedish Council for Advance Tax Rulings held that special reasons were at hand not to apply the third-party rule, meaning that the shares should be considered qualified for the applicants.

The advance tax ruling has not been appealed by the Swedish Tax Agency.