Swedish Tax Ruling on Liechtenstein Foundations Hits Beneficiaries

Recently, the Administrative Court of Appeal in Stockholm delivered a verdict in a tax case concerning the Swedish classification of two Liechtenstein foundations. A divided court concluded that the foundations corresponded to Swedish family foundations, which resulted in a substantial tax hit for the Swedish beneficiary of the foundations. The verdict illustrates that connections to foreign foundations or trusts can entail considerable tax risks for individuals residing in Sweden.

Brief overview of Swedish taxation of trusts and foundations

There has long been legal uncertainty surrounding how foreign foundations and trusts should be treated under Swedish tax law. The main reason is that trusts, and to some extent foundations, are constructs unfamiliar to the Swedish legal system.

In recent years, however, clarifying case law has emerged from the Swedish Supreme Administrative Court. In essence, this case law establishes that an assessment should be made as to whether the foreign trust or foundation can be considered equivalent to a Swedish family foundation. The fundamental criteria that must be fulfilled for a Swedish family foundation to be created are therefore applied to the foreign trust or foundation.

If the outcome of this assessment is that the trust or foundation is considered equivalent to a Swedish family foundation, the effect is typically that the beneficiary, provided that person is fully tax resident in Sweden, is taxed on all transfers from the foundation as employment income. The transfer is thus taxed as if it were salary received by the beneficiary, which can of course result in significant taxation given the high Swedish tax rate on employment income, which can reach up to 53 %.

If the opposite result is reached, meaning that the trust or foundation is not considered equivalent to a Swedish family foundation, the person who has the greatest control over the trust or foundation is instead regarded as the tax owner of the trust's or foundation’s assets. In such a case, taxation generally occurs in the category of capital income, which is subject to a lower tax rate compared to when distributions are taxed as salary. If the person or persons with the strongest control over the trust or foundation reside in Sweden, then the ongoing income should be included in that person's Swedish income tax return.

What were the circumstances in the court case?

The case concerned a Swedish individual residing in Stockholm who, together with his sister, was a beneficiary of two Liechtenstein foundations that appear to have been established by their father.

The two Swedish siblings had received relatively large amounts from the foundations, which were not reported in their Swedish income tax returns. The foundations were governed by statutes, comparable to articles of association, which specified that the foundations’ boards had significant discretion in deciding on disbursements of the foundations’ funds. In one of the foundations, the board also had the authority to amend the statutes and to remove or add beneficiaries.

However, in practice, it seems that the wishes of the beneficiaries were honored by the foundations’ boards, as their requests for disbursements had been carried out. The beneficiary also stated that he and his sister had credit cards issued in the name of the foundations, which they could use freely.

How did the Stockholm Court of Appeal reason?

In its reasoning, the Administrative Court of Appeal in Stockholm primarily focused on the content of the foundations’ statutes. As mentioned above, according to the statutes, the beneficiaries had virtually no control over the foundations. However, in practice they appeared to have had control, something that was corroborated by the testimony of one of the foundation’s board members, who stated that she had followed the beneficiaries’ instructions. The court nevertheless found that the siblings had provided contradictory information during the proceedings and that the evidence presented was not sufficient to override the significance of the statutes.

Given that the statutes did not grant the beneficiaries any legal rights to control the foundations or their assets, the Court of Appeal therefore concluded that the foundations were to be regarded as Swedish family foundations.

This led to taxation of the beneficiaries in the employment income category, along with a tax surcharge of 40 percent. In other words, a significant tax blow.

Nomadtax's comment on the verdict

The verdict highlights the importance of ensuring that a foreign foundation or trust is structured with Swedish tax law in mind, if any person connected to the trust or foundation is subject to tax in Sweden. In some previous cases, courts have placed decisive weight on practical circumstances, meaning that the actual behavior did not follow the statutes. In this case, however, it is clear that the Administrative Court of Appeal in Stockholm chose to primarily rely on the statutes when assessing how the foundations should be viewed under Swedish tax law.

Are you a beneficiary, settlor, or trustee of a foreign trust or foundation, and live in Sweden? Do not hesitate to contact us for advice regarding the Swedish tax classification of the structure.