New inquiry may reshape the tax treatment of directors’ fees

The Swedish Government has appointed an inquiry to review whether directors' fees should be taxed like other personal assignments.

Swedish version here

Under current Swedish tax practice, remuneration for board appointments in a limited liability company is subject to a presumption developed through case law. Under this presumption, the remuneration is taxed as employment income in the hands of the individual board member. This applies even where the remuneration is paid to a company owned by, or employing, the board member. The rationale has been that a board appointment is personal in nature and must be performed by a natural person.

No corresponding legal presumption has been established for other assignments of a personal nature, and this asymmetry has prompted the government to appoint an inquiry.

A deeply divided Supreme Administrative Court

The legitimacy of the presumption came under close scrutiny in the Supreme Administrative Court's decision HFD 2019 not. 31, where the case had been referred to the court in plenary. Such referrals are generally reserved for matters of particular importance and may indicate that the Supreme Administrative Court is considering departing from prevailing practice.

However, the majority of the court chose to uphold the presumption. It acknowledged that it may be questioned whether it is justified and appropriate to place such significant emphasis on the personal nature of an assignment, thereby treating board appointments differently from other assignments of a personal nature. Nevertheless, the majority decided not to make use of the opportunity offered by the plenary proceedings to change the existing practice.

The decision was, however, strikingly divided. Of the sixteen justices participating in the case, nine were dissenting in one way or another, and six of them argued for a fundamental change of the existing practice. The dissenting justices emphasized that considerations of consistency and systematic coherence in taxation support the application of the same criteria to all assignment fees, regardless of the nature of the assignment. They also questioned why the fact that an assignment may only be held by a natural person should be decisive for tax purposes, pointing out that a number of other assignments share this characteristic, including bankruptcy trustees, liquidators and public defence counsel.

The scope of the inquiry

As described, current practice results in a distinct tax treatment of directors' fees, arguably making it less advantageous to provide board services through a limited liability company. Given these concerns, the Ministry of Finance has appointed an inquiry to review the taxation of remuneration from board appointments and other assignments of a personal nature.

The inquiry is tasked with:

• conducting a review of how remuneration from board appointments and other assignments of a personal nature are taxed;
• proposing amendments to the Income Tax Act to ensure that directors’ fees are treated in a manner equivalent to remuneration from other services of a personal nature;
• when designing its proposals, giving particular consideration to the importance of consistent tax treatment and the objective of enhancing companies' ability to attract and retain external board expertise; and
• submitting any necessary legislative proposals.

The inquiry is to present its findings no later than 31 October 2027.

Comments

The inquiry addresses an area that has long been the subject of debate. In its 2019 decision, the Supreme Administrative Court questioned the underlying rationale of the existing legal position but nevertheless upheld the presumption, citing the importance of legal stability. That the legislature is now taking this initiative is therefore both welcome and natural.

The outcome of the inquiry may have significant practical implications for consultants, lawyers and other professional board members who currently invoice board appointments through their own companies and face tax obstacles that do not apply to other comparable forms of professional engagements. We will continue to monitor the inquiry and provide further analysis when the proposals are presented.