Structuring the investment
Investments in commercial real estate are generally made as indirect investments through special purpose holding companies. This is, in part, to avoid real estate transfer tax when divesting the property (see Section V.iii, below), but the main reason for an indirect holding is to ensure that capital gains upon a transfer of the real estate (indirectly through the transfer of the shares in the holding company) are tax-free for the seller (see below).
The special purpose holding companies most commonly used are Swedish limited liability companies. Such companies are formed through registration with the Swedish Companies Registration Office. A limited liability company is represented by a board of directors and in some cases a managing director. At least half of the board of directors and the managing director must be residents within the European Economic Area (EEA). If none of the representatives is resident in Sweden, the company must authorise a person resident in Sweden to receive service of process on behalf of the company. The liability of the shareholders in a limited liability company is by default limited to the company's share capital and it is very rare for the corporate veil to be pierced in Sweden (whereby the shareholders would be directly liable for a limited liability company's debt and obligations).
Another form of legal entity that is sometimes used for owning real estate is a limited partnership. However, limited partnerships are currently not as common as the use of limited liability companies. See below for a more elaborate discussion on the most common investment vehicles.i Acquisition vehicles and acquisition financing
Local Swedish acquisition vehicles are usually established as limited companies. The acquiring company is normally financed through a combination of equity, external loans and shareholder loans. Sweden does not have thin capitalisation rules, so generally equity is kept fairly low. Interest deduction limitations rules may, however, limit the tax deduction of interest paid to affiliated companies. Sweden has also, as of 1 January 2019, introduced earnings stripping rules that may limit interest deductions (see below).
The acquisition vehicles and the target company are often merged post-completion of an acquisition to get the acquisition financing into the target company holding the real estate and thereby making it possible to inter alia use the real estate as collateral for the financing. Should the initial structure be left intact, however, the financing costs may still be set off against taxable income in the target or real estate holding company in subsequent years, using group contributions with fiscal effects.ii Interest deductions
As mentioned, there are currently no formal thin capitalisation, formal debt-to-equity rules in the Swedish tax system, save for the recently introduces earnings stripping rules. Shareholder loans and debt-to-equity ratio may thus to a degree be used to provide for tax optimisation through interest deductions and flexibility in moving cash upstream.
Compulsory liquidation will, however, be triggered under the Swedish Companies Act should the equity of a company fall below 50 per cent of the registered share capital, unless the equity is restored to an amount corresponding to at least the entire registered share capital. Hence, it is often recommended to keep the registered share capital limited compared to the market value of the company containing real estate or to the free equity of the company.
Interest accrued on third-party loans is generally tax deductible provided the interest is not related to profits or distribution of profits. Interest between affiliated parties must be at arm's length to be deductible. Interest paid between affiliated companies that are in excess of an arm's-length interest rate is not tax deductible to the extent it exceeds the arms'-length interest rate. Provided the interest on intercompany loans is properly benchmarked and documented, interest costs are normally deductible.
There are interest deduction limitation rules in Sweden covering intercompany loans between affiliated companies and interest costs on such loans. Put simply, expenses related to such loans will only be tax-deductible if the beneficial owner of the interest is taxed at a level of at least 10 per cent, and provided that the loan was not exclusively, or as good as exclusively (at least to 90 per cent), put in place for tax reasons; or the beneficial owner of the interest is an EEA resident, and the loan was predominantly put in place for business reasons. The scope of the interest deduction limitation rules covers all loans from affiliated companies regardless of the purpose of the loan. Companies are considered to be affiliated if they could be seen as predominantly jointly managed, or if one of the companies, directly or indirectly, has significant influence over the other company. A company is defined as a legal entity or as a Swedish partnership. Foreign equivalents also fall under the definition in the Swedish Income Tax Act of a company if the association has the ability to acquire rights and undertake obligations; the ability to institute legal obligations before a court and other authorities; and separate partners cannot freely dispose over the association's assets.
Furthermore, as of 1 January 2019 Sweden has introduced earning stripping rules. The rules are based upon the EU Anti-Tax Avoidance Directive (ATAD), which in turn is based upon BEPS Action 4. The new rules limit interest expense deductions to – much simplified – net interest expenses of up to 30 per cent of earnings before interest, tax, depreciation and amortisation (EBITDA). This limitation only applies – also much simplified – to net interest expense exceeding 5 million kronor (in a group). Equalisation of interest deduction capacity within a group is possible, provided the companies qualify for Swedish tax consolidation. Negative net interest not possible to deduct in one year may be carried forward for up to six years, but is forfeited in the event of a change of control.iii Pre-exit restructuring
Put simply, a real estate holding company may transfer real estate to a subsidiary (including a newly formed company or acquired shelf company) at a price equalling the lower of the tax assessment value and the tax base value, without any adverse income tax consequences. Such a transfer will, however, trigger a real estate transfer tax (see Section V.iii, below). The subsidiary can subsequently be divested without any tax consequences.iv Divestment
A divestment of real estate is subject to capital gains taxation. For corporate entities the tax rate is generally 21.4 per cent.
There is a capital gains tax exemption for Swedish corporate entities on gains related to the disposal of shares 'held for business purposes'. Shares in Swedish corporations and participations in partnerships (as well as in foreign companies) can qualify as shares held for business purposes, and thus be divested tax exempt. The rules are applicable also for real estate owning companies, but not for construction companies or companies holding estate as current assets.
There are no restrictions on foreign investors owning or registering title to real estate in Sweden. However, it is still common practice for foreign entities to establish limited liability companies in Sweden through which real estate will be held.