Swedish ABs: Lilla Nygatan is not the only place to find treasure

comment - 25 February 2014

Swedish ABs: Lilla Nygatan is not the only place to find treasure

Luckily not all treasure in Sweden is buried beneath the basement floor. Sweden also has a very attractive investment holding company regime that offers a number of advantages from a tax perspective, as a result ofthe wide participation exemption afforded to domestic companies and possible exemptions from withholding tax. This combination is ideal for a flourishing private equity industry.

For investment holding companies, Sweden offers an unusually generous tax regime that exempts companies from capital gains on the sale of shares and dividends distributed from qualifying participations. These rules apply to all shares held for “business purposes” which is deemed to cover most privately held shares and participations of at least 10% in quoted companies (if held for at least 12 months). This regime, in combination with limited thin capitalisation rules and generous exemptions from withholding tax, all support highly effective cross-border financing structures using Swedish companies, both as traditional holding companies and as fund vehicle (read more).

The typical private equity fund vehicle in Sweden is an Aktiebolag (or AB). This is an ordinary unregulated company that incorporates the usual fund terms and issues a mixture of ordinary shares and participating instruments to facilitate an efficient cash-in/cash-out platform for investors. The AB has proved popular in Sweden because with an AB, tax is simply levied at the AB level, and insofar as the AB does not receive entirely exempt (i.e. non-taxable) income, any taxable returns can largely be neutralised through the use of structured products. Investors outside Sweden are not subject to Swedish tax on any returns they make on their investment, and normal rules apply to investors in Sweden. With regard to VAT, it is possible to group the various management entities of the AB to avoid tax arising on ordinary management and advisory fees.

The operating environment in Sweden is also refreshingly efficient. Swedish law does not prescribe the regulation of closed-ended investment funds and, therefore, no authorisations are required unless either:

  • the AB offers securities to more than 200 investors, or
  • the AB is in-scope of the Swedish Alternative Investment Fund Managers Act (AIFMA), which was introduced in July 2013 and is supplemented by regulations issued by Finansinspektionen (or FI).

Find out more here.

Sweden, unlike many other Member States, has an established and active venture capital industry that has very successfully made use of the tax, regulatory and operational efficiencies of the AB over recent years to achieve a cost-effective platform for investment (read more). This phenomenon caught broader industry attention in 2013 following the successful fundraising of Adelis Equity Partners’ debut fund (read more) which proved that Swedish vehicles were a credible proposition for international investors (either directly or through the use of feeders). This was significant, because, it occurred at a time when many of Sweden’s larger private equity firms were searching for a pragmatic local fund solution that balances the fiscal imperatives of general partners and investors against mounting regulatory, political and carry-related pressures to be seen to operate fully in an onshore context.

Aztec Group is very privileged to have worked for many years with a number of the Nordic’s leading private equity firms, which represent a significant proportion of the Group’s business. The development of the AB, therefore, has presented us with a perfect opportunity to establish a local presence to serve one of our core markets directly. We very much anticipate that there will be demand for each of our specialist private equity-focussed product offerings: Corporate Services, Fund Services, Depositary Services, Investor Services.

If you would like to know more, please do not hesitate to contact me or visit us at our new offices in Stockholm.

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If you would like to discuss outsourcing to the Aztec Group or are considering migrating a fund or SPV, please call James Duffield, Head of Business Development, on +44 20 3818 0250.

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