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Change from a sole trader to a limited company

Here is necessary information regarding changing corporate form from a sole trader to a limited company.

A corporate reorganisation can occur in one of two ways:

  • Asset transfer (sale) - means that you sell all the assets of the business to the limited company.
  • In-kind transfer - means that you form the limited company by contributing non-cash property, such as equipment, furniture and fittings or stock. An auditor must certify the value of non-cash property.

Start and register limited company

When you transfer the assets and liabilities of a business for a price that is less than market value, the difference is normally taxed as an own withdrawal. This means that you will be taxed as if the transfer was made at market value.

However, there are exceptions to the withdrawal taxation rule. During a reorganisation, you can transfer the assets (or non-cash property) at their taxable value, even though this may be less than the market value. You will not be taxed on the transfer if

  • the entire business or an entire branch of business is transferred to the limited company
  • all shares are qualified
  • the limited company has no deficit.

As a general rule, if these conditions are met, your own withdrawals are not taxed.

When the limited company assumes liability for the debts of the sole trader business, this is part of the payment for the property.

If the entire business or branch of the business is transferred, the transfer is exempt from VAT. This means that no VAT should be recorded on the transfer itself.

Employer contributions

You must report employer's contributions and tax deducted for all accounting periods up to and including the date of deregistration. The deregistration date is stated on the Tax Agency's deregistration notice.

VAT

You must report VAT for all accounting periods up to and including the date of deregistration. The deregistration date is stated on the Tax Agency's deregistration notice.

Allocation reserve

You can transfer allocation reserves held by your company if the transfer of the property does not give rise to withdrawal tax. However, assets of equal value to the reserves being transferred must be transferred at the same time, either as part of the assets and liabilities or by a private contribution from you, the owner. You may not include this amount in the acquisition cost of the shares in the company.

Expansion fund

You may not need to recognise the expansion fund for tax purposes. That is the case if all real assets (e.g., real estate, furnitures and fittings and stocks, i.e., not bank deposits, etc.) calculated in the capital base are transferred to the limited company, except for cash assets.

An asset value (i.e., real assets or other assets) equivalent to at least 79.4% of the expansion fund must be transferred to the limited company, either as part of the assets and liabilities or by a private contribution from you, the owner. You may not include this amount in the acquisition cost of the shares in the company.

At the last reporting of economic activities you can make a interest distribution. Interest distribution can be either positive or negative and is calculated on the capital base. The capital base is calculated on the basis of assets and liabilities at the beginning of the tax year.

You must make a negative interest distribution if there is a negative capital base of more than SEK 50,000 at the end of the last financial year.

You may make a positive interest distribution if there was a positive capital base of more than SEK 50,000 at the end of the last financial year. When activities cease, positive interest distribution can also be made for reversed tax allocation reserves as well as reduction of expansion funds.

If your last financial year is shorter than 12 months, the amount of the distribution must be adjusted to take account of the length of the financial year.

Commercial property

When you transfer a commercial property, you must record this in the capital tax schedule . However, there is no capital gain if you set the sale price at the equivalent of your cost amount less the depreciation deductions you have previously made.

If the market value of the property is less than the cost amount, the sale price is considered to be the market value. You may then deduct any resulting loss.

You must account for the transfer of the property in the capital tax schedule on the Tax Agency's form K7.

If you are voluntarily liable to pay VAT tax on the letting of premises, the limited company usually takes over your rights and obligations associated with the voluntary VAT liability.

The company will apply for entry into the land register with the Swedish Mapping, Cadastral and Land Registration Authority (Lantmäteriet).

Download the Swedish Tax Agency's form K7 (in Swedish)

Swedish Mapping, Cadastral and Land Registration Authority website

Individual social security contributions and special payroll tax

If you don't want to wait until next year to declare, you can calculate your final individual social security contributions or special payroll tax and make the deduction directly in the last income tax return for the economic activity.

Otherwise, you make a standard deduction in your income tax return for individual social security contributions or special payroll tax, then you must make a final reconciliation the following year.

Submit income statements

As of tax year 2019, new rules apply. From this date, most employers will have to report payments and tax deductions at individual level in their PAYE tax return. Statements must be made every month, meaning you no longer need to submit an annual income statement for these payments.

Submit income statements to the Tax Agency (in Swedish)

Deficit in economic activities

If your economic activity operates at a deficit in its last year, you may be able to deduct the loss, under certain conditions, in the capital tax schedule of your tax return for the coming year (or distributed over the next three years).

If you end your activity within the first five financial years, you can also offset the deficit against income from services.

Paying the right preliminary tax

The Tax Agency does not automatically change your preliminary tax upon receiving your deregistration notification. Therefore, after you have reorganised your business, you should make a new preliminary tax calculation for the final profit or loss of your sole trader business.

If the tax you calculated is less or more than the preliminary tax you are currently paying, you must submit a new preliminary income tax return.

If you do not submit a new preliminary income tax return to the Tax Agency, the previous decision will apply. You must pay your preliminary tax. Therefore, ensure that sufficient funds are deposited to your tax account on the date when the preliminary tax is debited on your tax account. Otherwise, you risk a tax debt being handed over by the Tax Agency to the Enforcement Authority for collection.

Download the Swedish Tax Agency's Preliminary income tax return SKV 4314 (in Swedish)

Change your preliminary income tax return at the Tax Agency's e-service (in Swedish)

Close the books correctly

You must make a financial statement one final time regardless of when in the year you close your business. This means that the last financial year may be shorter than twelve months.

Final reporting of the sole trader business

You make your final reporting of your sole trader business in your income tax return the year after you reorganise the business as a limited company. You should include the income and expenses you have incurred up to the reorganisation.

Don't forget to record even the final business transactions and to keep the accounting information for at least seven years.

Remember to deregister your old company if you will cease operations completely.

Deregister your company