Investment Savings Account vs ordinary savings Cecilia Gunne Advokat/Partner/Tax Lawyer

Historical background Swedish tax incentives for investment funds • Aktiesparfond 1978-1984, tax refund (!) upon investment max. saving SEK 400/month • 1984-1990 tax exempt capital gains on Allemansfond max. saving SEK 2 000/month • 1990 tax reform 20 per cent tax on dividends and gains on Allemansfond, in stead of 30 per cent • 1997 gains and dividends on all investment funds tax at 30 per cent – incentives gone • 2012 no tax at fund level, 0.12 % tax on market value at the beginning of each year + 30 % tax on gains.

Historical background 1997 value of savings in investment funds Country

Population

Individuals

Value of investments

Denmark

5.2 million

350 000

DKK 30 000 000 000

Finland

5.1 million

60 000

SEK 9 000 000 000

Norway

4.2 million

500 000

SEK 30 000 000 000

Sweden

8.2 million

3 000 000

SEK 250 000 000 000

Tax system for capital income • Since 1991 Sweden has a dual income tax system • Earned income is tax at a progressive rate of 32 – 57 % while income from capital, i.e. interest, dividends and capital gains are taxed, at a flat rate of normally 30 %. • Swedish gift and inheritance taxes were abolished in 2004 • The Swedish wealth tax was abolished in 2006 • Rater complicated rules apply to capital gains – Acquisition price is the average acquisition price for the type of security in question. For listed equity related securities 20 % of sales price may be used as deemed acquisition price. – Losses on equity related securities may only be set off against gains on equity related securities. Excess losses deductible against other capital income to 70 %.

Taxation of investment funds since 2012 • No taxation at fund level • Swedish resident unit-holders pay double tax – 30 % tax on actual dividends and capital gains and – 30 % tax on annual standard income of 0.4 per cent of portfolio market value at beginning of each year • fund tax of 0.12 % per year for individuals (30 % x 0.4 %) • fund tax of 0.09 % per year for companies (22 % x 0.4 %)

• Swedish and non-Swedish funds are included • Funds held through ISA or life assurance are excluded

Investment Savings Account – ISA • Tax simplification for private investors – Introduced in 2012 – Only for individuals, not for companies – No new investment vehicle – only a Swedish tax product

• Complex set of rules – Specific ISA Act with a lot of details (32 Articles) – Amendments to existing tax legislation

• ISA holdings taxed on standard income – No tax on actual dividends, interests, capital gains etc – Low annual tax on standard income – Works like a wealth tax.

Taxation of ISA • An ISA-portfolio is taxed each year as if it had generated an income equivalent to the Swedish Government Bond interest Rate (SBR) (statslåneräntan) at end of November preceding year • From 2016 SBR + 0.75 % and a minimum of 1.25 % – SBR November 30, 2015 = 0.65 per cent; income 0.65+0.75=1.4 per cent

• Taxable value of ISA-portfolio measured four times per year • ¼ of value January 1st, April 1st, July 1st and October 1st + ¼ of transfers to ISA during each year

• Taxable value x SBR + 0.75% = deemed income • Taxed as “capital income” at 30 %

Example – Taxation of ISA May 14th 2015 Mr. Andersson transferred SEK1.2 million to a new ISA and invests in funds and quoted shares.

On July 1st the ISA-portfolio market value has increased to SEK1.4 million. In September he sells shares and withdraws SEK200 000 from his ISA. On October 1st the ISA-portfolio value is SEK1.1 million. For 2015 the bank will calculate and report the following ISA-income for Mr. Andersson

January 1st April 1st Transfer July 1st October 1st Taxable value

¼ of 0 ¼ of 0 ¼ of 1 200 000 ¼ of 1 400 000 ¼ of 1 100 000 ¼ of 3 700 000

0 0 300 000 350 000 275 000 925 000

ISA-income (925 000 x 0.9 % =) SEK 8 325 Capital income tax (8 325 x 30 % =) SEK 2 498 For 2016 the SBR deemed income will be 0.65 % +0.75% = 1.4 % => 12 950 => SEK 3 885

Effective Swedish Tax on ISA in per cent of market value (and non-pension life assurance) 3,00% 2,74% 2,57%

2,50%

2,13% 2,00% 1,72%

1,75%

1,50%

1,44% 1,34% 1,32%

1,34%

1,39% 1,19% 1,16%

1,12%

1,00%

0,97% 0,87%

1,05% 0,84%

0,75% 0,63%

0,50%

0,495% 0,45%

0,42% 0,27%

0,00% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Comparison ISA – ordinary savings ISA

Ordinary savings

+ Tax 30 % on value x (SBR 0.65% + 0.75 %) = 0.42 % on average value for 2016 + No extra tax on actual income + Standard income is treated as income from capital against which interest costs and losses on ordinary savings is deductible + - Losses are not deductible - Investment restrictions; complicated + rules for forbidden assets - Double taxation of high interest.

Tax 30 % on actual income and capital gains 0.12 % yearly investment fund tax Complicated calculations of capital gains using average acquisition price Losses deductible; with certain restrictions No tax where there is no income and no increase in value • Management costs non-deductible since 2016.

ISA advantages for the Tax Authority • The banks file income statements on the “standard income” • The standard income is pre-printed on individual’s Income tax return forms • The tax authority does not have to handle reporting of interest, dividends, capital gains on investment fund and sales of other securities • No handling of tax payer’s calculations of capital gains on securities – a source of under-paid tax • The state gets a lower but steady income • Tax gets paid whether the stock exchange goes up or down.

Dos and don’ts when implementing ISA • Keep the ordinary income taxation system parallel to ISA • Make sure the citizens can trust the legislator not to raise the standard income tax once the system is implemented • Do not try to lock up tax payers in ISA system • Have as few restrictions as possible • If “forbidden” assets are kept on the account, tax them in the ordinary system, not the whole account • Let savers move assets to and from ISA without selling them over the stock exchange • Remember to give credit for foreign withholding tax on dividends.

ISA – What investments are allowed? Cash and “Investment Assets” • Cash on bank accounts – SEK, EUR, USD, CHF etc

• Investment Funds – Swedish UCITS or non-UCITS – Non-Swedish equivalents

• Quoted securities – All kinds of instruments; shares, bonds, derivatives etc • Quoted on Regulated market (EEA or elsewhere) or • Multilateral Trading Facility (MTF:s within EEA)

ISA – Forbidden assets ”Alien” Assets • Non-investment assets – Unquoted securities – Non-equivalent investment funds (eg. Real estate funds)

• Some unquoted securities are temporarily accepted – New issues of securities – 60 days – Corporate actions – 30 days

• Disqualification on individual basis – Shares covered by tax rules for closely held companies – Securities in companies where the client has substantial interest > 10%

ISA – Double tax for high interest • High interest on bank account – If interest rate on cash in ISA exceeds SBR, the interest received is taxed ordinarily – Maximum 0.9% interest on cash (2015)

• Double taxation – Cash deposited is included in ISA capital base – Ordinary interest income and ISA-income

• No limits for interest bearing securities – Money market funds, listed bonds etc.

Change of residence • ISA is only recognized in Sweden – local tax product – Considered as a normal portfolio of savings in other jurisdiction – No tax shelter for unrealized income – Double tax treaty problem

• Life assurance is well-recognized all over the world – A product issued by an EEA-insurer must be respected in other EEA states – Many countries provide tax advantages for life assurance – A life assurance contract can be modified to fit local rules

• Careful planning necessary if residence changes

Problems with Swedish ISA-solution • Extensive investment restrictions – Works well for retail customers investing in UCITS-funds and blue-chip stocks – Unsuitable for tailor-made investment strategies with specialized investment funds, OTC-forward contracts etc.

• Banks need advanced control system needed to offer ISA – If the detailed ISA-rules are not respected the tax status of ISA ceases

• Mistakes can be costly for the saver – A wrong-handling might be discovered after many years…

• My contacts

Cecilia Gunne [email protected] Tel: +46 8 599 29 000 • Fax: +46 8 599 29 001 Dir: +46 8 599 29 034 • Mob: +46 73 786 10 19

LINDSKOG MALMSTRÖM ADVOKATBYRÅ P.O. Box 27707, SE 115 91 Stockholm, Sweden Visitors: Norrmalmstorg 14, Stockholm www.lmlaw.se