Inbound investment into Israeli operating companies using Swedish holding companies offers a number of advantages from a tax perspective, due in the main to:
a. The wide participation exemption afforded to Swedish companies under
Swedish domestic tax legislation, and;
b. The Double Tax Treaty in place between Sweden and Israel.
A combination of the above can often lead to a situation where dividends and capital gains are received free from Swedish or Israeli tax in the Swedish holding from an Israeli operating subsidiary.
The Swedish participation exemption
Dividends received by Swedish companies are generally exempt when received from foreign legal entities. The exemption is granted if the dividends would have been exempt had the distributing company been resident in Sweden.
Under these rules, dividends received by a resident company from another resident company on business-related (organizational) shares are exempt from Swedish corporation tax.
The exemption does not apply to dividends on shares held as inventory.
Unquoted shares are always deemed to be business related (and qualify for the exemption) if they constitute fixed business assets. There is no minimum holding period for unquoted shares.
Quoted shares that constitute fixed business assets are deemed to be business related if they:
a. Represent at least 10% of the company's voting rights or;
b. are otherwise considered necessary for the business conducted by the shareholding company or any of its affiliates (Ch. 24, Sec. 14 IL).
A further requirement for quoted shares is a minimum holding period of 1 year.
Similarly, capital gains derived from the alienation of foreign shares are exempt from tax in Sweden to the extent that they constitute a business-related holding, with the same proviso as above for listed shares.
The Sweden-Israel Double Tax Treaty
Article VI (2) of the Swedish-Israeli treaty provides that:-
“Dividends paid by an Israeli company to a resident of Sweden out of income which has been subject to Israeli income tax on the profits of the company, shall be exempt from further tax in Israel.”
Therefore, assuming that the Israeli company has paid tax in Israel on its general profits, there should be no withholding tax charged in Israel to a dividend paid to a Swedish parent company.
Of note is that the Sweden-Israel double tax treaty is the only Israeli treaty currently in force which offers a 0% withholding on dividends out of Israel.
Substance
The Israeli tax authorities apply strict anti avoidance provisions with regards to outbound dividends, in the form of substance criteria such as number of employed individuals, office space, non-Israeli assets etc. Care should therefore be taken when setting up the Swedish company to ensure that relevant substance criteria are met.
Repatriating funds from Sweden
As a general rule, a final withholding tax (kupongskatt) of 30% applies to dividends paid by a Swedish company to a foreign company, unless the dividends are attributable to a business carried on by the non-resident company through a permanent establishment in Sweden, in which case they are subject to corporate income tax.
Under the rules governing the domestic exemption, dividends paid by a resident “company” to a foreign company on business-related (organizational) shares are exempt from withholding tax. A “company” for these purposes is defined as a foreign legal entity which is subject to taxation in its country of residence similar to the taxation to which Swedish resident companies are subject. This is generally taken to mean a corporate tax rate above 15.4%.
A foreign legal entity is deemed to be a foreign company if it is a tax resident, and liable to income tax, in one of the countries with which Sweden has a tax treaty, provided that the provisions of the relevant treaty concerning the limitation of the right to tax apply to the company and the company is a resident of that country according to the provisions of the treaty.
Overview of suggested structure
1. Similarly taxed/EU Exit route
- Tax efficient receipt and distributions of income
2. Sweden Hold. Co
- Domestic exemption on dividends and capital gains if conditions met
- 0% WHT on interest, dividends or liquidation distributions to similarly taxed/EU jurisdiction
3. Israel Operating Co
- 0% Withholding tax in Israel on dividends and capital gains derived by Swedish parent
This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion.
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