Sweden — a tax haven for those who prefer wealth accumulation over consumption?
Let me preface this article by quickly mentioning the Swedish marginal tax rate for earned income, a rate you might have heard is ”high.” Including payroll taxes (which compared to the American equivalent do not taper off after a certain point, but instead ceases to give social benefits for the individual and remains at the same rate, effectively becoming an income tax) the marginal tax rate in Sweden is 64%.
Even I, who am for free schooling and other social benefits I have come to be the beneficiary of in Sweden, feel this rate is a bit “rich.” It should also be noted that this top marginal tax rate applies to all income above ~$61,000.00 (annually), i.e., roughly $5,000.00/month. [1]
Being interested in stocks, an integral part of my stock analysis usually entails looking over the largest owners of shares in the companies of interest. Doing this, I quickly realised that companies with names of the format Last Name Holding AB was often populating the list, with the last name often belonging to the founder(s) of the company in question.
Naturally, I became interested in why this was the case. Long story short, dividends from other private companies (or public if you have enough of a % interest) are tax free on the holding company level [2]. Seeing as C-corp is the only real viable option for corporate structuring, this is what is used both for operating businesses and holding companies. The corporate tax rate is currently 20.6%, which they in this instance only have to pay on the operating business level. There is however, another huge benefit: Capital accumulation.
First, let us discuss the American view on (personal) holding companies. I remember first encountering this in a book discussing corporate structure and immediately thinking: ”Huh, that is not what it is like here.” In short, personal holding companies (companies where > 50% of its outstanding shares are held by 5 or fewer individuals and where > 60% of income stems from ”passive” sources, i.e., dividends, royalties, annuties, etc) [3] are subject to a 20% additional tax above the usual 21% c-corp tax rate on all undistributed (retained) earnings, effectively incentivizing owners to distribute earnings. [4]
In contrast, the Swedish tax system does not have any such rule, meaning, there is nothing hindering entrepreneurs from accumulating wealth in their personal holding companies and distributing it in a tax efficient manner (or not distribute it at all).
Instead of paying up to 64% in tax on the income from my operating companies if paid out in salary, I can instead keep it in the holding company, pay 20.6% corporate tax, and even defer a portion of that for up to 6 years at a low interest rate. Seeing as I view the tax system as an incentive structure, this tells me that the Swedish IRS wants people to accumulate wealth & invest through the corporate vehicle, instead of taking distributions/drawing a salary and consuming.
Naturally, this is what I’ll subscribe to doing. It just so happens that this is what I would have done anyways, be that through a corporate vehicle or personally.
