Stockholm Court of Appeal: Jersey Trust Not Equivalent to Swedish Family Foundation for Tax Purposes– Tax Agency Loses

In April 2025, the Administrative Court of Appeal in Stockholm delivered a new ruling, in which the appellant won against the Swedish Tax Agency (Skatteverket). The case concerned the Swedish tax classification of a Jersey trust, where the Swedish Tax Agency had considered that a Swedish individual connected to the trust should be taxed with progressive tax rates (up to 55%) on distributions from the trust as income, rather than being regarded as the owner of the trust's assets for tax purposes. However, the Administrative Court of Appeal concluded that the Swedish Tax Agency was mistaken.

Brief Overview of Swedish Taxation of Trusts

In Sweden, there has long been legal uncertainty surrounding the tax treatment of foreign trusts. Sweden is not a party to the international trust convention ("Hague Convention") from 1985, which governs the recognition of trusts. There is also a lack of statutory regulation regarding the tax treatment of trusts in Sweden. However, more and more guiding case law has emerged from the Supreme Administrative Court ("HFD").

In short, this case law means that a trust can be viewed in two ways:

1. Equivalent to a Swedish Family Foundation

2. Not equivalent to a Swedish Family Foundation
   

In the first case, the tax effect is that no ongoing taxation occurs on the trust itself, to the extent that Swedish withholding tax is not levied on, for example, dividends from Swedish companies. Instead, taxation occurs on the recipient of distributions from the trust, with income tax applying. This can lead to very high tax rates, as income tax is progressive, with rates of up to 55%.

In the second case, if the trust is not regarded as equivalent to a Swedish Family Foundation, the effect is that either the settlor or the beneficiary is considered the direct owners of the trust's assets. In other words, the trust is "seen through" for Swedish tax purposes.

The classification of a foreign trust is typically based on an assessment of the trust's deeds, in line with the principles established by the Supreme Administrative Court. This assessment is often technical and complex, and it is not uncommon for the founding documents to be extensive and written in highly complex legal English. The classification can also change, according to the case law of the Supreme Administrative Court, meaning that, for example, the death of a settlor of a trust may lead to a new classification. This is a particular risk for trusts established primarily for the purpose of distributing inheritance to the settlor's heirs, which is common in countries such as the United States and the United Kingdom.

Background - Facts of the Case

The background to the case was that a Swedish individual requested a reassessment of his Swedish income tax returns for the tax years 2016–2018, primarily as a result of a newly issued ruling from the Swedish Supreme Administrative Court. The individual wished to include in his tax base the in Sweden favourable standardized income tax for a life/endowment insurance policy, comparable to a so-called "Annuity", owned by a Jersey trust, where he was both a beneficiary and a settlor. The Swedish Tax Agency opposed this, arguing that the trust constituted an independent estate, equivalent to a Swedish Family Foundation, and therefore the assets could not be taxed personally for the individual. The Swedish Tax Agency argued for a classification that would result in the beneficiary/settlor being subject to Swedish progressive income tax (up to 55%) on distributions from the trust.

Administrative Court of Appeal's Consideration

The Administrative Court of Appeal examined whether the trust's assets could be considered to have been separated from the settlor's estate to such an extent that an independent estate had been created. This is a key requirement for a foreign trust not to be treated as transparent for tax purposes and not to be considered equivalent to a Swedish Family Foundation, meaning that either the settlor or a beneficiary would be taxed as if they were the owner of the trust's assets.

This classification, that is, not equivalent to a Swedish Family Foundation, is generally more advantageous, as the person controlling the trust is then subject to Swedish Capital Income Tax at a rate of 30%, rather than the beneficiary being subject to Swedish progressive income tax, ranging from 30% to 55%. However, there are situations where classification as equivalent to a Swedish Family Foundation might be more advantageous. This must be analyzed based on the trust and the individual circumstances of the beneficiaries. In the trust deed, and other documentation, it was revealed that the individual:

• Was one of several beneficiaries throughout the period.

• Had the right to appoint and remove trustees.

• Was required to consent to changes in the list of beneficiaries.

• Actually exercised these rights by changing the trustee in 2012 and instructing changes to the list of beneficiaries.
  

In light of this, the court concluded that the individual had, in practice, had decisive influence over the trust's administration and distribution of assets. Taken together, the court determined that the assets could not be considered to have been separated in such a way as to create an independent estate. Therefore, the trust did not correspond to a Swedish Family Foundation under Swedish law.

Consequences of the Decision

The Administrative Court of Appeal upheld the appeal and confirmed that the taxpayer – in accordance with their request – should include the income tax for the years 2016–2018.

Given the favourable Swedish tax treatment of life/endowment insurance policies, with a standardized low tax of the insurance's market value, instead of taxation of each transaction, it is highly likely that this classification had significant tax advantages compared to a classification as equivalent to a Swedish Family Foundation, as this would have led to taxation at rates of up to 55% for the trust's beneficiary/settlor.

The fact that the case involved an appeal of a reassessment request further indicates that the Swedish Tax Agency had made an incorrect assessment of the trust's Swedish tax classification not once, but twice. The ruling shows that it is possible to achieve success in challenging the Swedish Tax Agency's decisions regarding the tax treatment of foreign trusts.

Do you have a connection to a foreign trust and are unsure if you have been taxed correctly in relation to it? Do not hesitate to contact us at nomadtax to address these issues.