Swedish Court Applies Anti-Avoidance Tax Rule to Trust Inheritance Case

In Sweden, the taxation of trusts, or of individuals with connections to trusts, has for a long time been uncertain. In the Swedish legal system the trust is a distinctly foreign legal construct, and Sweden is not a party to the international trust convention under which states have agreed on the treatment of trusts. In many jurisdictions, most notably the United States, the United Kingdom, Australia and New Zealand, it is common practice to use trusts for distributing inheritance, often with the purpose of minimising taxes. However, this approach may have devastating consequences for heirs if they are resident in Sweden. Such was the case in a judgment from 2025 by the Administrative Court of Appeal in Gothenburg, where the Swedish General Tax Anti-Avoidance Rule was considered applicable. The case is outlined below.

How are trusts taxed in Sweden?

After a long period of uncertainty, guiding judgments by the Supreme Administrative Court have clarified the legal position on how Sweden treats trusts and individuals connected to trusts from a taxation perspective.

According to this case law, the question to be determined is whether a trust should be regarded as equivalent to a Swedish family foundation. In other words, the criteria for the establishment of a Swedish family foundation are applied to the trust, and if the trust essentially fulfils these criteria, then the trust and persons connected to it are treated as if the trust were a Swedish family foundation.

In short, the assessment of a trust aims to establish whether the settlor has relinquished control over the assets contributed to the trust. A detailed analysis must therefore be made of the founding documents of the trust (the so-called deeds), as well as any applicable foreign legislation governing the trust.

An assessment must also be made of whether the trust is managed independently from its beneficiaries. If the beneficiaries hold significant control over the trust and can determine how its assets are managed, this generally results in the trust not being regarded as equivalent to a Swedish family foundation, but rather as a management arrangement on behalf of the beneficiaries. In such cases the person or persons exercising control over the trust are taxed as if they personally owned the trust assets. This means that such persons, if they are tax resident in Sweden, must manually include their share of the trust’s income in their Swedish personal income tax return, which can be highly complex.

What were the circumstances of the case, and how did the court reason?

The case concerned a foreign trust, most likely established under English law. The trust was managed by a trustee who was not also a beneficiary of the trust. The Administrative Court of Appeal therefore held that the trust and its assets should be regarded as separate from both the beneficiaries and the settlor, and that the trust thus corresponded to a Swedish family foundation. From the judgment it appears that the court disregarded the fact that the trustee had followed the beneficiaries’ wishes in respect of distributions and the appointment of new beneficiaries, which has been taken into account in other lower court rulings. The court instead placed greater weight on the trust’s founding documents, under which the beneficiaries had no formal authority over the trustee, authority which rested entirely with the trustee.

What made this case particularly interesting was that the trustee had appointed a new beneficiary of the trust, namely an estate of a deceased person in which the trust beneficiaries were also heirs. Upon the death of the settlor, the estate was appointed as a new beneficiary of the trust, and the other beneficiaries waived their rights in the trust in favour of the estate. The trust beneficiaries thereafter received funds from the estate, through which the money had merely passed.

Remarkably, the court chose to invalidate the arrangement through application of the Swedish General Tax Anti-Avoidance Rule, which is highly unusual in Sweden. The application of this statute is often precluded by its strict conditions, most notably the requirement that the arrangement must be considered to conflict with the purpose of the legislation, a requirement that is generally difficult for the Swedish Tax Agency to prove.

In this judgment, however, the Administrative Court of Appeal in Gothenburg found that all four criteria of the General Tax Anti-Avoidance Rule were met:

1. that the legal act, alone or together with other legal acts, forms part of a procedure that results in a substantial tax benefit for the taxpayer,

2. that the taxpayer directly or indirectly has participated in the legal act or acts,

3. that the tax benefit, in light of the circumstances, can be assumed to have been the main reason for the procedure, and

4. that a tax assessment based on the procedure would be contrary to the purpose of the legislation as expressed in the general design of the tax provisions and in those provisions that are directly applicable or have been circumvented through the procedure.

   
   

In essence, the court held that the procedure of appointing the estate as a beneficiary of the trust resulted in the distributions becoming tax exempt for the heirs of the estate, instead of being taxed as periodic support payments (at rates up to approximately 53 percent), which would have been the case if the distributions had been made directly from the trust to the heirs who were resident in Sweden. The court also held that there was no indication that the legislator intended any other outcome than taxation of distributions from trusts.

Analysis of the case; commentary

As mentioned above, it is relatively uncommon for the General Tax Anti-Avoidance Rule to be considered applicable. This should also be the case with respect to the Swedish taxation of trust income.

The decision makes it abundantly clear that there are significant risks in allowing another taxable entity to receive funds from a trust and subsequently pass them on, for example as a gift or inheritance, to the intended recipient. At nomadtax we are aware that such arrangements have been recommended by certain Swedish advisers, which means that persons who have implemented such structures may now be at risk of a substantial unexpected tax liability.

Do not hesitate to contact us if you wish to obtain assistance with trust-related tax matters.