This article is a short case study about how best to structure service fees vs dividends in an international subsidiary of a Swedish AB limited company.
Situation
A Swedish company is expanding into Australia and needs to establish a subsidiary. The question: how to move money back to Sweden in the most tax-efficient way.
Three ways to move money back to the parent company
There are three main options for moving money from the Australian subsidiary to the Swedish parent: management/service fees, dividends, and loan repayments.
Service fees are taxed at 20.6% in Sweden. The Australian subsidiary deducts the fee (avoiding ~30% corporate tax there), and the Swedish parent pays 20.6% on the income. This looks like the most efficient option.
Dividends face approximately 40% total tax. The Australian subsidiary first pays 25-30% corporate tax on its profits. Then when distributing the remaining profit as a dividend, Australia withholds 15%. The dividend is then received essentially tax-free in Sweden under the participation exemption (Article 24(5) of the tax treaty.
Loan repayments can be used if you capitalize the Australian entity with a loan from Sweden. Interest payments have 10% withholding tax.
The challenge is that you cannot simply maximize service fees to get the lower tax rate. Transfer pricing rules require that fees reflect actual services provided at arm’s-length market rates. If the Australian subsidiary doesn’t retain adequate profit for its functions and risks, tax authorities will adjust the structure—typically with penalties.
This is where companies run into trouble. They set up aggressive fee structures to shift profits out of Australia, then face audits from the Australian Tax Office. The supposed tax savings disappear when deductions are disallowed.
Recommended approach
Typically recommended is using both methods based on what they actually do:
Service fees for real services. If the Swedish parent provides management oversight, IT infrastructure, or brand licensing, charge market-rate fees for those specific services. This is taxed at 20.6% in Sweden, but the fees must be documented and justifiable. For transactions over 5 MSEK annually, you need full transfer pricing documentation.
Dividends for remaining profits. After paying for legitimate services, the Australian subsidiary will have residual profits. These should be distributed as dividends. The effective tax rate is approximately 40%, but this is the correct way to repatriate profits that aren't tied to specific services.
To give you an example: €100 profit → 30% Australian tax = €70 remaining → 15% withholding = €10.50 → €59.50 net received tax-free in Sweden.
This balanced approach demonstrates substance in both countries and avoids profit shifting red flags.
Tax treaty conditions
The Sweden-Australia Double Tax Treaty (1981) sets dividend withholding at 15% and interest withholding at 10%. The participation exemption means dividends are received essentially tax-free in Sweden, but only if the Australian subsidiary derives its principal income from active business operations, not passive investment income.
This is an important condition that people often overlook. If the Australian subsidiary is primarily holding investments or securities, the exemption doesn't apply.
Compliance requirements
Transfer pricing documentation must be in place before you start making charges between the companies. This isn't optional. You need written agreements and documentation showing that your fees are set at arm's-length rates.
In Sweden, you must report the holding in your corporate tax return and declare any taxable income received. The holding must be structured as "business-related" to qualify for the dividend exemption.
Key principles for a compliant structure
The goal is building a structure that both tax authorities will accept. This means:
- The Australian subsidiary retains adequate profit for its functions
- Service fees reflect actual services at market rates
- You have documentation in place before transactions occur
- Both entities demonstrate real business substance
Planning this before you establish the subsidiary is much easier than trying to fix it later.
Browse through our guides on doing business in Sweden for more insights or check out our Business Attraction Index to find the most suitable markets to set up or expand your business.
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