How to Avoid the Swedish Exit Tax

An increasing number of states have introduced exit tax regimes in order to ensure that assets held by individuals who emigrate remain subject to taxation even after the individual ceases to be tax resident in the state concerned.

Such exit taxes are often justified by the argument that the underlying value creation or income has occurred while the individual was resident in the state. In Sweden, the so-called ten-year rule fulfils a similar function by allowing Sweden to tax certain capital gains realised by former Swedish tax residents who have moved abroad and become non-residents. This article explains how the Swedish ten-year rule operates and outlines the possibilities for mitigating or avoiding its effects.

What Is the Swedish Ten-Year Tax Rule?

The ten-year rule was introduced into Swedish tax legislation during the 1980s, at a time when increasing globalisation and capital mobility made it significantly easier for individuals to relocate assets to jurisdictions with lower levels of taxation. Since its introduction, the rule has been amended on several occasions.

Purpose and Legal Function of the Ten-Year Rule

The fundamental purpose of the ten-year rule is to enable Sweden to tax capital gains realised by individuals who are no longer tax resident in Sweden, provided that the gain is realised within ten years from the date on which the individual ceased to be tax resident in Sweden.

In order for the rule to apply, the individual must previously have been tax resident in Sweden, meaning that the person must have lived in Sweden and fulfilled the domestic criteria for tax residency..

Which Assets Are Covered by the Swedish Ten-Year Rule?

Types of Securities Within the Scope of the Rule

In its current form, the ten-year rule applies to a broad range of financial instruments, including in particular:

• Shares

• Mutual funds

• Bonds

• Options and similar derivatives
  

The rule is therefore highly relevant for individuals holding investment portfolios when emigrating from Sweden.

Important Limitations – Foreign vs Swedish Securities

A crucial limitation is that the ten-year rule does not apply to foreign (non-Swedish) securities if those securities were acquired at a time when the individual was not tax resident in Sweden.

For Swedish securities, such as shares in a Swedish company, no corresponding limitation exists. As a result, Swedish securities are generally covered by the ten-year rule regardless of when they were acquired.

Interaction With the Swedish 3:12 Rules

The ten-year rule also applies to shares and interests that fall within the scope of the Swedish 3:12 regime. This means that, unless Sweden’s taxing rights are limited by an applicable tax treaty, an individual who moves abroad may still be subject to the very high effective tax rates associated with the 3:12 rules even after emigration.

While this outcome may appear severe, there are, in certain cases, planning opportunities available with professional tax advice.

What Is the Practical Effect of the Swedish Ten-Year Rule?

Illustrative Example

Assume that a German citizen moves to Sweden and resides there for several years, thereby becoming tax resident in Sweden. During this period, the individual acquires shares in a Cypriot company. After a number of years, the individual moves back to Germany and ceases to be tax resident in Sweden.

Because the shares were acquired while the individual was tax resident in Sweden, the shares fall within the scope of the Swedish ten-year rule. Consequently, Sweden retains the right to tax any capital gain realised upon a sale of the shares during the ten-year period following the individual’s emigration.

Given that Swedish capital gains taxation is comparatively high, this result often comes as an unwelcome surprise to individuals who assume that emigration alone is sufficient to sever Swedish taxing rights.

Are There Ways to Avoid the Swedish Exit Tax?

Limitation Through Tax Treaties

In many cases, the effects of the Swedish exit tax can be reduced or entirely eliminated through the application of tax treaties. A significant number of Sweden’s tax treaties limit Sweden’s right to apply the ten-year rule.

Depending on the treaty in question, the outcome may be that:

• The ten-year rule does not apply at all

• Sweden’s taxing right is limited to a shorter period, such as five years

• The rule applies only to Swedish citizens
  

The precise effect depends on the wording of the relevant treaty.

Treaty Residency as a Prerequisite

Reliance on a tax treaty generally requires the individual to be considered a tax treaty resident of the state to which they have moved. Determining treaty residency is a legally complex assessment and often requires careful planning prior to emigration.

Special Planning Opportunities Prior to Leaving Sweden

ISK Accounts and the Ten-Year Rule

Holdings within an account subject to the Swedish ISK tax regime are not covered by the ten-year rule. As a result, an exit from Sweden can in some cases be structured by:

• Selling securities prior to emigration

• Repurchasing them at an appropriate time

• Achieving a step-up in acquisition value
  

This can lead to significant tax savings in future years.

Advanced Structuring and Reclassification Strategies

In certain circumstances, advanced tax planning strategies may be available under which capital gains can be reclassified as dividend income, with the result that the ten-year rule does not apply. Such strategies require careful structuring and should only be undertaken with advanced professional tax advice.

When Should Professional Advice Be Sought?

If you are considering moving from Sweden and hold securities that may fall within the scope of the Swedish ten-year rule, it is strongly advisable to seek professional tax advice well in advance of your departure. Proper planning can, in many cases, significantly reduce or eliminate exposure to Swedish exit taxation.

If you would like assistance in relation to the Swedish exit tax and the ten-year rule, please feel free to contact us to learn more about how we can assist.