Are you living in Sweden, and anticipating a distribution from a foreign trust? Or do you plan to set up a trust for the benefit of family members who live in Sweden? What would the tax consequences be? These are common questions asked by international families with ties to Sweden. Espescially in 2024, since UK's government announced a change in its tax policy applied on settlors and beneficiaries in Offshore Trust, it is important to be aware of Swedish Tax Risks.
"Trust distributions risks being taxed with up to 55 % Swedish tax, in the hand of the beneficiary!"
Swedish legal recognition of trusts
Initially, we would like to point out the fact that trusts in common law jurisdictions (USA, U.K., Australia etc.) are somewhat alien to the Swedish legal system, which follows a civil law system. The 1985 Hague Trust Convention was never signed or ratified by Sweden, implying that Sweden in general do not recognize trusts.
Therefore, there has been legal uncertainty for a long time regarding how trusts should be treated from a Swedish tax perspective. In this article, we will cover some basic aspects of how distributions from trusts are taxed when the beneficiary is a tax resident in Sweden, including potential tax risks and opportunities.
The Swedish tax claim
As a general rule, Sweden aims to tax a Swedish tax resident on their global income, which includes income from a non-Swedish trust. However, since there is no concept of a trust in Swedish legislation, the classification of a distribution from a trust must be determined using internal Swedish tax rules. Unfortunately, there is no written law to consult, when assessing potential tax effects of a non-Swedish trust.
Instead, in recent years, the Swedish Supreme Administrative Court has provided some guidance through its verdicts on how to treat trust distributions received by Swedish tax residents. Based on the court's case law, it is clear that one must assess whether the trust can be considered as similar to a Swedish Family Foundation ("familjestiftelse"). This legal assessment is quite complicated and requires a thorough examination of the trust's deeds and similar documents, together with Swedish court practice.
If the trust is deemed as substantially identical to a Swedish Family Foundation, distributions from the trust will be treated as employment income for the beneficiary, provided they are a Swedish tax resident. As a consequence, distributions would be subject to up to 55 % tax. If the income is not properly declared in the annual tax return, one can also risk an additional 40 % tax penalty on the due tax amount. On the other hand, if the trust is not considered identical to a Swedish Family Foundation, distributions are treated as non-taxable gifts, i.e. totally tax free for the receiving beneficiary. Therefore, it is evident that a person who is a tax resident in Sweden would prefer the trust not to be seen as a Swedish Family Foundation.
However, there are situations when a settlor of the trust is subject to a Swedish tax claim on the trust's income and capital gains, implying that Sweden does not recognize the formation of the trust. Such situations usually brings big tax risks with it for the settlor of a trust, since the Swedish Tax Agency would levy penalties on the settlor for not having declared the trust's income as its own income.
The tax assessment of non Swedish trusts
In short, the assessment mainly revolves around determining whether the settlor, i.e. the founder of the trust, still has control over the trust and its equity. Factors indicating the existence of such control may include the settlor also acting as the trustee or protector of the trust, and whether the trust's assets are protected from the settlor's creditors.
The assessment is made both by reviewing the trust's deeds, in the light of Swedish case law. Also, one should examine the way the trust is operated in practice, i.e. what degree of control the different parties involved in the trust has on the trust and its assets. This assessment should be formed by a Swedish lawyer.
Conclusions
The Swedish tax treatment of trusts are complicated and solely dependent on case law.
A professional Swedish tax lawyer should always make a assessment of the trust, in order to be able to overview potential Swedish tax consequences for the trust, the settlor, trustees, and the beneficiaries.
With some legal creativity, there are also ways to affect the parameters used to determine whether the trust is seen as a Swedish Family Foundation.
If you are a beneficiary, trustee or a settlor of a trust and a tax resident in Sweden, do not hesitate to reach out to us. We will assist you in assessing the proper tax treatment, including tax optimization strategies.
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