Swedish tax put on hold

Swedish companies with operations in Estonia will be able to breath more calmly, as the Swedish Cabinet announced shortly before Christmas its decision to postpone discussions on possibly levying taxes on Estonian-based Swedish companies, said tax consultants.

According to specialists at the Rodl & Partner consultancy, the next hearings on the issue are expected to be held in February or March.

"The development of the situation looks positive for Estonia since the Swedish government might agree to leave the undistributed profits of Estonian branches alone," said Christian Axelsson, tax adviser with Rodl & Partner.

"The crucial point is whether the Estonian tax on distributed profits would be viewed as an income tax accepted in Sweden," he added.

Reports in October 2002 said the Swedish Ministry of Finance was considering changes to the laws on central financial control which would tax the profits of banks subsidiaries operating in countries with relatively favorable tax laws, particularly Estonia, Ireland, and Switzerland.

The possible amendments in Sweden's CFC policy would mainly affect the revenues of Swedbank and SEB Group who own Hansabank and Eesti Uhispank respectively, and tax experts from Sweden claimed that would mean double taxation.

Currently the Swedish government receives revenue only from dividend income paid out to the Estonian banks' owners in Sweden. The Ministry of Finance reportedly wants to tap into subsidiaries' taxable income before dividends are paid out.

In Sweden undistributed profits are also taxed, but in Estonia a company does not have to pay any income tax for re-invested profits, a law designed to encourage foreign investments.

After the initial report appeared in October, rumors quickly spread that, if the amendments were adopted, Swedish companies based in Estonia might simply pack their bags and shift headquarters to Lithuania or Latvia.

Latvia has been planning to lower its profits tax to 15 percent from the current 22 percent, while Lithuania already has the 15 percent tax rate.

The subsidiary banks were taciturn about the possible changes, saying they had no plans to pack up and move south.

Axelsson didn't rule out that possibility in the future.

In case of the worst scenario, he said, not only financial businesses but all the Swedish companies will become subject to the new CFC policy.

"It would mean that all the profits of Estonian branches would be taxed every year in Sweden. Some producers might then move to Latvia or Lithuania," Axelsson said.

The Swedish Finance Ministry's tax proposal, even if adopted by the government, would still have to pass through two institutions - including Parliament - before becoming law, said specialists.

The proposal is part of the government's overall plan to make the country's tax system more liberal, said specialists.