It is possible to buy and own unlisted shares through a limited company. Instead of you being the private owner, it is the company that makes the investment, pays for the shares and is registered as the shareholder. Dividends and proceeds from a future sale therefore belong to the company.
This form of ownership can be of interest when the capital is already held in a limited company or when the returns are to be reinvested in new holdings. At the same time, the tax treatment differs from private ownership. Unlisted shares owned by a limited company are normally business-related shares (näringsbetingade andelar, a Swedish tax category), which often means that dividends and capital gains are tax-free in the company. A corresponding capital loss, on the other hand, is usually not deductible.
Investing through a company does not change the risk or liquidity of the shares. Before a purchase you therefore need to assess both the unlisted company and the ownership structure in which the investment will sit. Anyone who wants to buy and sell unlisted shares also needs to check how the holding is to be registered, held in custody and accounted for.
What does it mean to invest through a company?
When a limited company buys unlisted shares, the company becomes the legal owner. It is the company's name and corporate registration number that appear in the transfer agreement, the share register and any custody account registration. The individual who owns the investment company may not automatically use the capital or receive dividends privately, since the assets belong to the limited company.
The purchase must be paid for with the company's funds, and the decision needs to be taken by a person authorised to represent the company. Shareholder rights such as voting rights, the right to dividends and the opportunity to take part in share issues then belong to the purchasing company. The owner exercises those rights through their role as authorised signatory or other authorised representative.
The investment can be made through an operating company, a holding company or a separate investment company. Which structure is suitable depends on, among other things, where the capital is held, how it is to be used and what other risks exist in the company.
When are the shares business-related?
Unlisted shares owned by a Swedish limited company are normally business-related if they are capital assets. This means that the holding must be an investment and not inventory in a business that trades in securities professionally. For an ordinary holding or operating company investing surplus capital, unlisted shares are therefore often business-related.
For unlisted shares there is normally no requirement that the owning company controls a certain proportion of the votes or has owned the shares for a specific period. Even a small holding can therefore be covered by the rules. This differs from listed shares, where the ownership stake, holding period and connection to the business can matter more.
The classification nevertheless needs to be assessed on the basis of the individual holding. Special rules may apply if the company trades in securities, if the shares are foreign or if the holding changes character. The tax treatment should therefore be established before a dividend is received or the shares are sold.
How dividends and gains are taxed
As a main rule, dividends on business-related shares are tax-free for the owning company. The same normally applies to a capital gain when the shares are sold. The company therefore does not usually pay corporation tax on this income, even though its other taxable profit is taxed at the ordinary corporation tax rate.
In essence, the rules mean the following:
- Dividends on business-related shares are normally tax-free in the company.
- A capital gain on a sale is normally tax-free in the company.
- A capital loss on business-related shares is normally not deductible.
- Money later withdrawn privately can be taxed as salary or dividends.
- Special exceptions can affect taxation in certain transactions.
Tax exemption in the company should therefore not be equated with the money being transferable to the owner tax-free. If the capital is later withdrawn as salary or dividends, tax arises for the individual. For owners with qualified shares in a close company (fåmansföretag, a Swedish company with few owners), the dividend is affected by, among other things, the rules on the threshold amount (gränsbelopp).
Company or private ownership?
With direct private ownership, dividends and capital gains are taxed in the hands of the shareholder. For non-qualified unlisted shares, five-sixths of the income is normally taxed as capital income, which usually results in an effective tax of 25 per cent. Qualified shares in close companies are instead covered by special rules and are normally reported on form K10 (a Swedish tax return appendix).
A company-owned holding can make it possible to sell a business-related share and reinvest the entire sale proceeds without first withdrawing the money privately. The downside is that a loss is normally not deductible and that the company needs to handle bookkeeping, an annual report and a tax return. The capital also remains in the company until it is withdrawn, for example as salary or dividends.
The choice between a private and a company-owned holding is therefore affected by where the investment capital is held, whether the returns are to be reinvested and how long the capital is to remain in the company structure. With private ownership, the rules on tax on unlisted shares also need to be weighed against the possibility of claiming a deduction if the investment is sold at a loss.
Holding company or operating company?
Both a holding company and an operating limited company can own unlisted shares. The difference lies mainly in which other assets, liabilities and business risks exist in the same legal entity. If the investment is made directly in the operating company, the shares are among the assets that can be affected if the business runs into payment difficulties or becomes subject to claims from creditors.
A separate holding company can separate the investments from the day-to-day business and gather several holdings in a common structure. Dividends and sale proceeds can then remain in the holding company and be used for new investments. At the same time, the structure brings additional administration, accounting and costs.
It is not always appropriate to form a new company solely for a single investment. Moving existing shares or capital between companies afterwards can also have tax and contractual consequences. The ownership structure should therefore be thought through before the purchase is made.
How the purchase is carried out
In a purchase by a company, the buyer must be stated with the correct company name, corporate registration number and address. The person who signs the order or transfer agreement needs to be authorised to represent the company, and payment must be made from the purchasing company. When a buy order meets a sell order, the trade follows the process for agreement, payment and delivery that applies to trading in unlisted shares.
If the shares are connected to Euroclear, they can normally be delivered to a custody account in the company's name, provided that the bank or custodian can accept that class of share. In other companies, the buyer is registered directly in the share register. The ownership registration must then show that the limited company, and not its private owner, holds the shares.
The transfer should document which company is the buyer, the number of shares, the price, the payment terms and the time of the transfer of ownership. A clear transfer agreement for unlisted shares reduces the risk of uncertainty about the terms and provides a basis for both the ownership registration and the bookkeeping.
Bookkeeping and documentation
The purchase must be recorded as a financial asset in the owning company. How the holding is classified and valued depends on, among other things, the purpose of the investment and which accounting framework the company applies. A long-term holding is normally reported as a financial fixed asset, while holdings intended to be turned over as part of the day-to-day business may be treated differently.
The company needs to keep records showing:
- The decision to make the investment.
- Buy order, transfer agreement and contract note.
- Payment records from the company's bank account.
- Share register extract, custody statement or other proof of ownership.
- Share issue resolutions and other later corporate events.
- Records supporting valuation, sale and any impairment.
At the year-end close, the holding needs to be valued in accordance with the accounting rules the company applies. If the value of the shares has fallen, an impairment may need to be considered, but an accounting expense does not automatically mean that the company receives a tax deduction. The accounting and the tax treatment should therefore be checked separately.
Dividends, share issues and sale
When the owning company receives a dividend, the payment must go to the company and be recorded there. If the portfolio company carries out a new share issue, it is also the limited company that decides whether to exercise the subscription right. Taking part may require new capital and affect both the ownership stake and the total acquisition cost of the investment.
On a sale, it is the company that signs the agreement, receives the purchase price and transfers the shares. The share register or custody account must be updated so that the new owner is registered correctly. The records from the purchase, later share issues and the sale need to be kept even when the capital gain is considered to be tax-free.
Tax exemption for business-related shares applies as a main rule, but certain exceptions may apply. Rules on, among other things, shell companies, securities trading businesses and foreign holdings can affect the outcome and should be assessed before a larger or more complex transaction is carried out.
The risks are the same
Owning the shares through a company does not reduce the risk in the underlying investment. Unlisted shares are usually traded less often than listed shares, and there may be neither a current market price nor enough buyers when the holding is to be sold. All or part of the invested capital can be lost.
The company's finances, funding needs, ownership structure and terms for future capital raising therefore need to be analysed regardless of the form of ownership. Before making a decision, you can explore unlisted companies, compare available company data and review current market activity. The form of ownership should then be assessed on the basis of the company's finances and your plans for the capital.
A more structured secondary market with clearer order placement, price data and documentation is the starting point for Eqvor's business. If you need to sort out practical questions about a company account, authorisation, custody account or delivery, you can contact us before an order is placed. Individual questions about tax and accounting should be assessed by a qualified tax or accounting adviser.
Disclaimer: The content of this article is provided for information purposes only and does not constitute tax advice, legal advice or an individual recommendation. Tax outcomes are affected by applicable law and the specific circumstances of each individual case. Eqvor strives to ensure that the information is accurate and up to date, but gives no express or implied warranties regarding the accuracy, completeness or timeliness of the content. To the extent permitted by applicable law, Eqvor disclaims liability for any damage or loss arising from the use of the article or reliance on its content. Anyone considering acting on the information should obtain independent advice from the Swedish Tax Agency (Skatteverket) or another qualified adviser.
