Avoidance of multiple inheritance taxation within Europe
STOCKHOLM UNIVERSITY
Faculty of law
Swedish national report1
1. DOMESTIC LAW
1.1. Overview
In Sweden tax upon death is levied under the Inheritance and Gift Tax Act 1941 (lag om
arvsskatt och gåvoskatt, SFS 1941:416). The inheritance tax is based on the individual
shares. Each beneficiary - heir or legatee - is taxed separately on the value of the
property which he receives from the estate. In other words, Sweden follows the
inheritance tax system, not the estate tax system.
Even though the tax system is closely linked with the civil law rules governing the
distribution of estates, the assessment of the tax is not based on the actual allocation
between heirs and legatees. The reason is that the division of the estate is by its nature a
private agreement between the parties and in principle it is in their free discretion to
make decisions about the partition. There are no time limits on when it must take place.
Nor is there any general obligation to file the distribution document with the authorities.
Instead the assessment of the tax is based on the estate inventory. Under civil law the
parties have a duty within a specified time of the death to prepare an estate inventory,
which for instance should include a report on the assets and liabilities of the deceased
such as they existed at the time of the death. The inventory must be submitted to a court
of law for registration. The inheritance tax is determined by the court simultaneously
with registration of the estate inventory. The court fictitiously allocates the net assets set
out in the estate inventory between heirs and legatees, by applying the main rules of
civil law or any last will which the deceased may have made.
The inheritance tax is supplemented by a gift tax. The main purpose of the gift taxation
is to prevent that the inheritance taxation is circumvented by gifts inter vivos. The gift
tax rules are framed in general terms, however. With certain exceptions, all gifts are
taxable, regardless of the donee´s relationship to the donor. The ratio behind this rule is
the increased tax-paying ability which gifts provide to the donee.
1.2 Criteria for tax liability
As regards international relationships, the Swedish legislation on inheritance and gift
tax is primarily based on the principle of residence, secondarily on the principle that
assets with special links to Sweden should be taxed there. Nationality is also used as a
criterion for levying inheritance and gift tax in cases where a Swedish national has
given up residence in Sweden. The criteria of residence and nationality are employed
1
By Christer Silfverberg, professor of Fiscal Law, Stockholm University. For a general discussion of the
Swedish inheritance and gift tax system see Erik Waller, National report of Sweden for the IFA Congress
1985, Cahiers de droit fiscal international, Volume LXXb p. 537 and Helena Rempler, European Taxation
1994, no. 10/11 p. 410.
with regard to the deceased/donor even though it is the heir/donee who is liable to pay
the tax.
Inheritance tax is imposed on the value of all property, wherever it is situated (unlimited
tax liability), if the deceased/donor was a resident of Sweden at the time of death/gift or
if the deceased/donor was a Swedish national or a person married to a Swedish national
who had resided in Sweden within ten years prior to the time of death/gift.
The concept of residence is not defined in the Inheritance and Gift Tax Act. In
considering whether the deceased/donor was resident in Sweden or not, special account
is taken to the holding of a permanent home. But also individuals who have their
habitual abode in Sweden are considered resident in Sweden for inheritance tax
purposes.
In addition inheritance tax is levied where the deceased/doner is not a resident of
Sweden on inheritance and gift of following types of property (limited tax liability):
1. real property situated in Sweden;
2. moveable property situated in Sweden and belonging to a business pursued by the
deceased/donor in Sweden;
3. the usufruct of property set out under 2. as well as the right to royalties for such
property and participations in Swedish tenant-owner associations or companies with
main purpose to provide housing for the shareholders; and
4. shares in Swedish companies and partcipations in Swedish economic associations,
cooperative societies, partnerships, mutual funds and shipping companies. Inheritance
of property under this category is subject to Swedish inheritance tax only if the
deceased was a Swedish national. A gift of any property mentioned under this category
is taxable if the donor or the donee is a Swedish national or if the donee is a Swedish
legal entity.
1.3. Tax avoidance
The general anti-avoidance rule that is included in the Tax Avoidance Law, is not
applicable on transactions concerning the inheritance and gift tax.
However, the Inheritance and Gift Tax Act does contain some provisions that aim at
preventing tax avoidance. One example is the cumulation rule imposed to prevent that
the progressivity of the tax is circumvented by splitting transfers into several
transactions. In assessing the tax on one acquisition earlier acquisitions from the same
person are taken into account. Under the main rule, the time limit within which the
different acquisitions must have taken place is ten years.
Another rule that could be mentioned in this context stipulates unlimited tax liability for
Swedish nationals for a period of ten years after giving up residence in Sweden (see
under 1.2.)
A third example is the special restrictions for using a favourable valuation method when
small businesses are transferred by gift (se under 1.4.) Such gifts must not involve
conditions to the benefit of the donors or others. In addition, the gifts must comprise the
entire right to the property, and the donee must retain ownership of an essential part of
the property for at least five years.
1.4 Valuation and exclusions
The basic principle for valuation applied in the Inheritance and Gift Tax Act is that the
property shall be valued at the market price. For certain types of assets special rules
apply which in many cases lead to significant reductions in relation to the market value.
The most significant exceptions from the market price rule are:
- real property is taxed at its assessed value, which should reflect 75 % of the market
price;
- shares listed on the Swedish or foreign Stock Exchange are valued at 75 % of the
quoted value;
- shares which are not listed on the Stock Exchange but marketed on another open
market, for instance the over-the-counter market, are valued at 30 % of the market price.
- property which has formed part of a business pursued by the deceased/donor directly
or indirectly through a closely-held company, is valued at 30 % of its net value.
There are no rules excluding certain goods from taxation, except that in individual cases
Government may wholly or partly exempt historical, scientific or artistic collections
from tax.
1.5. Rates and tax-free base amounts
The rates of the Swedish Inheritance and Gift Tax Act are progressive and vary both
with the value of the property received and with the legatee's relationship to the
decedent. Beneficiaries are divided into three classes, with a special rate table
applicable to each class. Class I comprises the spouse and children of the deceased.
Class III comprises different associations of a public nature and Class II all beneficiaries
who do not belong in Class I or Class III. For the most favoured class, Class I, there is a
taxfree allowance of SEK 280.000 for the surviving spouse and SEK 70.000 for each
child. In addition, a child is entitled to an additional allowance if he has not yet reached
the age of 18 years. Beneficiaries under Class II and III are entitled to a taxfree
allowance amount of SEK 21.000.
Bequests and gifts to foundations and other associations are entirely exempt from
inheritance and gift tax if the organisations are promoting objectives for the public
benefit, such as scientific research or the care of elderly, sick or disabled people.
The tax rate schedule of Class I is as follows:
Taxable amount, SEK
Inheritance tax, SEK
0-300.000
300.000-600.000
600.000-
10 %
30.000 + 20 % within the range
90.000 + 30 % within the range
The highest tax rate in Class II and III is also 30 %, the difference being that the rate is
effective at a lower taxable amount.
The gift tax is subject to the same schedule as inheritance tax. The taxfree base amount
is SEK 10.000 per year for all categories of donees. It should be noted that beneficiaries
under Class III are exempt from gift tax.
According to Swedish marital law, the spouses normally have a right on dissolution of
marriage to receive half the value of the other spouse´s property. What a spouse
receives on death of the other spouse as a consequence of this rule is not inheritance but
an acquisition by marital law. Thus, the acquisition is not subject to inheritance tax.
Example: A man dies. His spouse and their two children are the sole heirs to the estate.
The spouses´ aggregate wealth has a value of SEK 2.000.000.
One half of the aggregate wealth is exempt from tax. The other half is inherited by the
surviving spouse. Joint children of spouses are not entitled to inherit until both parents
are dead. The spouse is allowed to the taxfree allowance of SEK 280.000. Thus, the
taxable share is SEK 720.000 and the tax is calculated to SEK 126.000.
The tax will often be reduced by way of the surviving spouse yielding all or part of her
right to her children.
1.6. Striking features
The most striking feature seems to be the rather high tax on average acquisitions in
combination with an inconsistent system for the valuation of property. Despite the
rather substantial reduction of the tax rates, enacted in 1982, the taxes are still high on
transfers of rather small amounts to close relatives. The highest tax bracket (30 %) in
Class I (spouse and children), applies already when the taxable amount exceeds SEK
600.000. The high taxes have caused some undesirable effects in practice. In order to
reduce these effects, special rules have been introduced for the valuation of property.
The result has been that almost all valuable types of property are subject to different
reductions in relation to the market value.
Another feature distinguishing the system from those of most other European countries
seems to be that gifts between spouses are taxed with no relief, apart from the general
basic allowance of SEK 10.000 per year. There are ways around this, however, for
spouses changing between the marital property law regimes.
2. DOUBLE TAXATION RELIEF
2.1. Unilateral relief
According to a provision under the Inheritance and Gift Tax Act, taxpayers can apply
for a reduction or waiver of the tax in cases of actual double taxation. Decisions on
these matters are made by the Government or a Government Agency on discretionary
grounds. There is thus no absolute right for the taxpayers to have the double taxation
effect removed. In practice a form of mutuality is required. If the other state is ready to
allow a reduction or waiver in a corresponding situation Sweden will, too, otherwise
not.
2.2. Tax treaties - Overview
Sweden has concluded tax treaties with several nations for the avoidance of double
taxation of inheritance. The treaties currently in force are set out in the following table:
Nation
Date of conclusion
Scope
Hungary
The Netherlands
Belgium
Italy
South Africa
Israel
Austria
Spain
Switzerland
United Kingdom
U.S.A.
Denmark, Finland,
Iceland and Norway
Germany
20/11/1936
25/4/1952
18/1/1956
20/12/ 1956
29/5/1961
15/5/1962
21/11/1962
25/4/1963
7/2/1979
8/10/1980
13/6/1983
12/9/1989
France
8/6/1994
Inheritance
Inheritance
Inheritance
Inheritance
Inheritance
Inheritance
Inheritance
Inheritance
Inheritance
Inheritance and gift
Inheritance and gift
Inheritance and gift
(multilateral treaty)
Inheritance and gift
(comprehensive treaty)
Inheritance and gift
14/7/1992
Even though most of the treaties are older than the OECD Model Convention the
provisions of the treaties in general are along the lines of the Convention. However,
some deviations can be noticed. As far as inheritance tax is concerned the scope of the
Model Convention is limited to the estates of individuals domiciled in one or both
Contracting States. Some of the treaties use other criteria in this respect. For instance
the applicability of some older treaties depends on the fact that the deceased on his
death was a national of one of the Contracting States (treaties with Belgium, Hungary,
Italy and the Netherlands). The treaty with Austria applies to inheritances of nationals
or persons domiciled in one of the Contracting states. A wider scope is used in the treaty
with United Kingdom, since this treaty is applicable to any person who is within the
scope of a tax which is covered by the treaty.
Some deviations from the Model Convention are due to the principles used by the
Contracting State on determining its worldwide taxation base. For instance, the treaty
with U.S.A. gives a contracting state the right to impose tax on its citizens, irrespective
of the domicile at the time of death or gift, and the treaty with Germany extends the
right to impose tax to the State where the heir or the donee is domiciled. However, in
both these cases a secondary right to tax is provided for, which means that the State in
question is obliged to give a credit for tax levied in the other Contracting State.
The treaty provisions allocating the taxing rights between the Contacting States are
likewise to a large extent similar to the Model Convention. However, deviations
concerning certain types of property occur in individual treaties. Moveable property,
for instance, is in some cases taxed on the base of situs. One example is "biens
mobiliers corporels" in the treaty with France. Another example refers to tangible assets
in the treaty with Spain. Under the latter treaty, shares in a company are also allocated
to the situs State, but only if the deceased was a domiciliary of the same State,
otherwise the shares are to be taxed in the State, in which the company is registered.
Another special article stipulates that ships and aircraft operating in international traffic
may be taxed in the Contracting State in which the place of the effective management of
the enterprise is situated (treaties with Switzerland, United Kingdom and France).
Some deviations from the OECD Model Convention depend on the internal legislation
in each state. One example is the right, according to the rule mentioned under sec. 1.5.
above, for the surviving spouse to exempt one half of the aggregate wealth of the
spouses from inheritance taxation. This rule is applicable under the treaties with United
Kingdom and U.S.A. even if the marital law preconditions do not exist.
2.3. OECD Model-conform?
As indicated above, all the Swedish treaties are either formulated in accordance with the
OECD Model Convention or, as far as the older treaties are concerned, in general along
the lines of the Convention.
2.4. Method to avoid double taxation
The treaties of later years (the treaties with United Kingdom, U.S.A., Germany, France
and the Nordic Multilateral Convention) are all based on the credit method. The treaties
with Spain and Switzerland provide for ordinary credit in some cases and exemption
with progression in other cases. All the other, older, treaties are based on the exempt
principle. The treaties with Belgium and the Netherlands entitle Sweden the right to
apply the exemption with full progression method. The Swedish tax on the remaining
property is levied at the highest rate which would be applicable if the entire property
had been subject to Swedish tax. The other treaties apply the exemption with
progression method. On the basis of this method Swedish tax is levied at the average
rate, which would be used if the entire property had been subject to Swedish tax.
3. EC LAW
First, it should be noticed that the impact of the EC Treaty on the provisions of the
Inheritance and Gift Tax Act has not been tested in case law. However, some of the
provisions may be an obstacle to the principle of free movement within the EU.
Sweden levies inheritance tax or gift tax on a worldwide base during a period of ten
years after a Swedish national, or a person married to a Swedish national, has given up
residence in Sweden. Since the development of EC Law has probably not yet reached
the point where it is forbidden for a Member State to discriminate against its own
citizens, the disputed rule seems to be acceptable as far as the Swedish nationals are
concerned. However, with respect to the spouse of a Swedish national it is more likely
that discrimination is found to take place if the person is a citizen of an EC Member
State.
Furthermore, it may be discriminating that shares, which are listed on over-the-countermarket or some other open market within Sweden are valued at 30 % of the quoted
value, while shares listed on corresponding foreign Stock Exchanges are valued at 75 %
of the quoted value.
According to a special rule, designed primarily for family business, property which has
formed part of such a business is valued at 30 % of its net value. In practice this rule has
been deemed not to be applicable on stocks in companies registered abroad. If the
company is located within EC the application of the rule seems to be an clear case of
discrimination.
4. CASE
According to domestic law Sweden will impose tax on the worldwide base if Sweden is
in the position of country A, B or C. If Sweden is in the position of country D tax is
levied only on the situs property. If the person deceases during a holiday in Sweden no
taxes will be imposed.
Of course a tax treaty could provide for avoidance of double taxation but the
preconditions depends on which other countries are involved in the case.