Legal Update: Proposed Changes to the Taxation of Real Estate
31 March 2017
On March 30, 2017, an official report was published containing several proposed changes to the rules governing the taxation of real estate. The current taxation regime has led to companies deferring the payment of capital gains taxes on real estate more or less indefinitely (whilst sometimes also avoiding stamp duty, through wrapping real estate in companies and trading in shares (instead of trading in real estate). The key elements of the procedure are the possibility to sell shares tax free due to the participation exemption and the lack of transfer taxes or similar in relation to sales of companies holding real estate. That said, it is market practice that a small discount is given for deferred capital gains taxes so the entire tax gain is not “realized” in economic terms. Another technique currently used to avoid real estate stamp duty is parceling. The mandate given by the government was to assess the tax situation of the players in the real estate market, analyze the effect of their tax planning, as well as developing suitable methods to tackle it.
The proposal will now be referred to stakeholders for consultation before a final version is handed to Parliament for voting. It is likely that the proposal will lead to changes in the tax regime relevant for the real estate market, but it is hard to predict to what extent and exactly what content can be expected. The new rules are proposed to enter into force on July 1st, 2018. If the proposed rules enter into force, the increase in tax revenues is estimated to be approx. EUR 0.77-1.66 billion in the short term.
The first reaction to the proposal from the real estate market was, to say the least, negative, and it remains to be seen if it will survive in its current form. Further, the proposal can also have indirect effects on banks, as their collaterals, which are often real estate, may decrease in value and result in financial instability.
The key proposals are as follows:
- The sale of a company which's assets predominantly consist of real estate will, simplified, be taxed as if the real estate was sold separately. The company sold will be liable to pay the tax. Exceptions are made for, inter alia, group internal transactions and cases where the sold company is listed or the income from the sold business is predominantly non-real estate related.
- In a sale such as referred to above, a standard income correlating to the stamp duty that would have been due in case the real estate was sold separated has to be reported by the company sold. The purpose is to compensate for the stamp duty which is avoided through the sale of shares.
- Parceling will be subject to stamp duty, effectively limiting the use of this technique to avoid stamp duty.
- The stamp duty for companies is lowered from 4.5% to 2% (the basis for the computation being the higher of the price paid and the tax assessment value).
- The classification of real estate into capital and current assets is to be removed and going forward all real estate are to be treated as capital assets from a tax perspective.
- A tax neutral transfer of real estate below the fair market value will have no effect on the acquisition value, tax base, and tax depreciations made.
On a more general level, the changes in taxation of the real estate market could exacerbate the shortage of housing in Sweden as well as indirectly effect other markets. Further, the review of the real estate market is just one of many initiatives to increase and protect the Swedish tax base, which in combination could come to have a large impact on the tax burden of companies and shareholders. Other tax regimes currently subject to changes are the interest deduction rules and the rules regarding closely held companies, just to mention a few. On top of these proposed changes in law, the general approach of the Swedish Tax Agency can be said to have become more aggressive, following a global trend where tax planning and tax avoidance are becoming increasingly scrutinized. In summary, the tax burden for real estate companies and other companies alike is likely to increase across the board, either through the introduction of new rules or a stricter interpretation of the rules already in force.
It would be prudent for taxpayers to test how the new rules apply to their particular circumstances, preferably before the end of 2017, so that any issues or opportunities can be surfaced and potentially addressed as soon as possible.
Please feel free to contact Christian Carneborn with questions regarding the current or proposed rules.
Please find additional comments on the proposal (in Swedish) here.