Ebba Perman Borg
Partner
Stockholm
Newsletter
Closely held companies and the third party rule – HFD 4611-22
by Ebba Perman Borg, Victor Elovsson and Maria Ström
Published:
On 20 February 2023, the Swedish Supreme Administrative Court (“HFD”) clarified in a ruling that the acquisition of shares in one closely held company through a new share issue by another closely held company does not imply that both companies are engaged in the same or similar activities when applying the so‑called third-party rule (Sw. utomståenderegeln). Thus, HFD changes the outcome of the prior preliminary ruling by the Swedish Council for Advance Tax Rulings.
In the case at hand, the applicant in the preliminary ruling was active to a significant extent in an operating company. The operating company was held to 70% by a holding company, in turn owned by 14 individuals. The owners of the holding company were not engaged in the operating company and did not own any shares in it directly. The applicant had been offered to acquire a small portion of shares in the operating company, and thus wanted to determine whether such shares would become so‑called qualified shares in closely held companies. Generally, the holding company's considerable holding would trigger the third-party rule meaning that the shares should not be considered qualified, provided that the operating company and the holding company are not engaged in the same or similar activities.
It may be noted that the holding company were to transfer capital to the operating company through a new share issue, and that profits from the holding company thus were to be transferred to the operating company. The Council for Advance Tax Rulings stated that the holding and management of profits generated in a business is a part of that business. Hence, due to the transfer of profits, the Council considered the operating company and the holding company to be engaged in the same or similar activities, causing the third-party rule to not be applicable and the applicant’s shares to be considered qualified.
HFD stated, in accordance with what the Council had stated, that the share issue would cause profits to be transferred to the operating company. However, since the holding company’s owners were not significantly engaged in the operating company, there was no risk of income from employment being converted into lower‑taxed capital income, even if the shares in the operating company would have been held directly by the holding company’s owners. Therefore, the operating company and the holding company could not be considered engaged in the same or similar activities, meaning that the third-party rule was applicable and that the applicant’s shares in the operating company should not be considered qualified.
