Swedish investment conglomerates

[John Hjorth]

Within the last few years, this kind of investment has caught my attention.

 

It has caught my attention for tax reasons. In short, it's to me the almost perfect investment, with regard to taxes in Danish tax deferred acounts.

 

Naturally one has to build some kind of conviction about what these conglomerates are actually doing - right now, and going forward - expected. That's hard work and somehow cumbersome & dull.

 

What I have been trying to build lately is a list, containing:

 

The listed Swedish companies, with regard to taxation, subject to the Swedish tax rules of an "Investment företag" In English: "Investment undertaking"[link: here.]

 

The listed entities so far identified by me, subject to those quite special Swedish tax rules, are:

 

Investor AB [iNV A STO or INV B.STO]  Link.

L. E. Lundbergföretagen AB [Lund B.STO]  Link.

Industrivärden AB [ INDU A.STO or INDU C.STO] Link.

Investment AB Öresund [ORES.STO] Link.

Kinnevik AB [KINV A.STO or KINV B.STO] Link.

 

Somewhere, on some Swedish website, a few months ago, I read, that there would be about a docen of companies with this particular status with regard to taxes mentioned above.

 

Which companies are the rest, that I've been so far not able to identify?

 

Any help on this question would be much apreciated - especially from my fellow Swedish board members on here.

 

Thank you in advance for any input.

[ScottHall]

Within the last few years, this kind of investment has caught my attention.

 

It has caught my attention for tax reasons. In short, it's to me the almost perfect investment, with regard to taxes in Danish tax deferred acounts.

 

Naturally one has to build some kind of conviction about what these conglomerates are actually doing - right now, and going forward - expected. That's hard work and somehow cumbersome & dull.

 

What I have been trying to build lately is a list, containing:

 

The listed Swedish companies, with regard to taxation, subject to the Swedish tax rules of an "Investment företag" In English: "Investment undertaking"[link: here.]

 

The listed entities so far identified by me, subject to those quite special Swedish tax rules, are:

 

Investor AB [iNV A STO or INV B.STO]  Link.

L. E. Lundbergföretagen AB [Lund B.STO]  Link.

Industrivärden AB [ INDU A.STO or INDU C.STO] Link.

Investment AB Öresund [ORES.STO] Link.

Kinnevik AB [KINV A.STO or KINV B.STO] Link.

 

Somewhere, on some Swedish website, a few months ago, I read, that there would be about a docen of companies with this particular status with regard to taxes mentioned above.

 

Which companies are the rest, that I've been so far not able to identify?

 

Any help on this question would be much apreciated - especially from my fellow Swedish board members on here.

 

Thank you in advance for any input.

 

John -

 

Can you explain the special tax rule in more detail? I used Google to translate the site, but the translation was difficult to understand.

[John Hjorth]

Scott,

 

These investment companies are in Sweden taxed, so that the company is basically not taxed, but the shareholders only, and instead, are taxed, to avoid double taxation.

 

The mechanics in the tax computation goes like this:

 

Basis for taxation for the company is a standardized income, which calculation basis is the market value of investments at the beginning of the year minus the value of what by Swedish tax law is defined as "business-related shares".

 

That calculation basis carries a standardized income of 1.5%. To that calculated standardized  income the company has to add dividends received from investments, and the investment company can deduct management cost [basically the most of the costs related to running the investment company, net financial expenses etc. [the most of these companies uses leverage to a modest extent], AND dividends paid out to shareholders.

 

The best way to get a feeling of the tax mechanism for such a Swedish company is to study the financials for Industrivärden AB. Just visit the website, switch to "English" by pressing that button on top of front page, grab the 2015 financials for the company, and study the tax note [note 8 on p. 45]. [industrivärden is in this respect "totally clean", because it has no wholly owned investments. The tax mechanism gets "burried" in the tax notes for the investment company, if there are wholly owned investments subject to joint taxation with the investment company, like in Investor AB and L. E. Lundbergföretagen AB.]

 

Industrivärden has made good money in recent years, despite that fact it has a tax loss to carry forward of SEK 7.054 B at the end of 2015.

 

So, in short, such a Swedish company can actually roll in and out of positions without incurring taxes on capital gains [and also not get deductions for losses on positions, if some investments goes south].

 

Such a Swedish company can actually hoard retained earnings much faster than a company not having this particular tax status, because it is not deferring taxes on unrealized capital gains on stock positions.

 

There are some conditions, that have to be fullfilled for a Swedish company to obtain this tax status:

 

1. The portfolio has to be fairly diversified.

2. The company has to have "many" shareholders.

3. The companys actual and real activity has to be almost exclusively management of securities.

 

- - - o 0 o - - -

 

If there were such rules in place here in Denmark as part of the Danish tax regime, I would start out monday morning at 8:00 AM building such a damn thing, starting out with my own money, getting the tax status later by taking in OPM.

[wachtwoord]

 

If there were such rules in place here in Denmark as part of the Danish tax regime, I would start out monday morning at 8:00 AM building such a damn thing, starting out with my own money, getting the tax status later by taking in OPM.

 

If you want that just move? It's very close.

[John Hjorth]

Great question, wachtwoord,

 

After thinking a bit about it: The reasons are several, and the common denominator for them are: Lack of mental flexibility, most likely geriatric based. My tent pegs are just hammered in the Danish soil, so they are stuck. Too lazy, too comfortable.

 

Actually, I haven't moved my butt for more than 32 years now.

 

They also speak so strange over there. It would in one way actually be like moving home. My grandfather on my fathers side was Swedish, and moved to the small Danish island Bornholm in the Baltic Sea from Skåne while young. On Bornholm, they also speak weird, language close to Swedish, more Swedish-like than Danish-like. I get reminded about it every time the old man gets angry, excited or eager.

 

I would like to move south in retirement though - I hate Danish winters. The Lady of the House won't hear talk about all this. I call my self her AUM, when we have disagreements.

[alwaysinvert]

Ratos

Creades

Bure

Latour

Svolder

Melker Schörling

Havsfrun

Traction

East Capital Explorer

Vostok New Ventures

Vostok Emerging Finance

 

There were more of them a couple of years ago, but there has been a push towards greater scale in order to get down the expense ratio and thus push down discount to NAV (Öresund is an activist in Svolder for this very reason). Also, some companies have just wound up because their discount to NAV was so consistently high. For a company on that list that can't really bear its costs of being a listed company, look at Havsfrun, which to my knowledge is the last one left of the "mini" investment companies. Maybe they will start popping up again somewhere down the line.

 

I would say the large opportunity in this space is largely over this time around. Almost none are at a large discount and some of them are even trading at sizable premiums at the moment. When you can copy most of their holdings much cheaper from a tax sheltered account and not give up flexibility, premiums are very hard to argue in favor of.

 

In some cases however you are buying companies with big unlisted holdings. The last three on the list are Russia focused companies, which makes available investments an ordinary private investor can't make. 

[John Hjorth]

Thanks for the large contribution to my list, alwaysinvert!, - it's very much appreciated.

 

Also thank you for your information and comments including your view on these kinds of investments at the moment. Actually, I'm having trouble valuing some of these companies and comparing them, because of different structures, generating different reporting structures caused by accounting conventions. [wholly owned investments vs. partly owned investments [listed/not listed].

 

I'm trying to make them comparable on some basic metrics and to decide on position size of each position of them in a basket, build the basket over some time, and then just basically sit on it long term, as a starting point [,meaning, always subject to that I may change my mind going forward, both with regard to basket size and individual position size].

[alwaysinvert]

By the way, in addition to number of owners (there have precedent setting supreme court rulings that 80 was not enough but 740 was, the real threshold is unknown) you need to have either 10% voting power of listed companies or stocks in unlisted companies to qualify, while also being diversified. An investment company also needs to have holding stocks as its primary function, as opposed to trading (free translation from Swedish legalese). Whatever that means in actuality.

[Jurgis]

For US investors it would be interesting to figure out which ones of these would be considered PFICs. US legalese hitting Swedish legalese, oh my.  :-\

[John Hjorth]

Jurgis,

 

I had to look up the US tax concept of a PFIC. It seems hairy to me. For my part, this is not an issue to give attention. For me, these Swedish investment conglomerates - as long as they are corporations - get "ordinary Danish tax treament" [in both taxable and tax deferred acounts].

 

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By the way, in addition to number of owners (there have precedent setting supreme court rulings that 80 was not enough but 740 was, the real threshold is unknown) you need to have either 10% voting power of listed companies or stocks in unlisted companies to qualify, while also being diversified. An investment company also needs to have holding stocks as its primary function, as opposed to trading (free translation from Swedish legalese). Whatever that means in actuality.

 

alwaysinvert,

 

From your post I get the sense that the Swedish tax regime is like here in many respects: Overall rules with a lot of lacking specifics, and the practice actually just materialize over time - by litigation - by court decisions up through the court/complaint system. Certainly not pretty by any measure, and a very expensive way to establish a tax practice, the only parties involved in that getting satisfied are tax lawyers, getting paid dearly. Actually over time getting paid to establish a practice, in a legal battle with the Swedish IRS [called in Swedish: "Skatteverket"].

 

What's your basis for what you have written about the rule existing about holding at least 10 per cent of the votes on each investee? I can't see that mentioned in what I've linked to prior in this topic. - Perhaps something here just has skipped my attention.

 

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I'm already invested in Investor AB, L. E. Lundberg Företagen AB & Industrivärden AB - small positions, Investor AB beeing the largest, at about 3%. And yes, ref. alwaysinvert, there are similarities - to some extent, but when you dive into them, they are not - actually, not at all - similar.

 

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To me mentally, these positions are competing with SCHO.CPH inside the portfolios.

 

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I expect over time to open separate topics for each in the investment ideas forum, if I choose to invest in the thing on my list [or already invested in it], otherwise I will just post my findings & conclusions - in short - max. 10 - 15 lines - in this topic.

[alwaysinvert]

What's your basis for what you have written about the rule existing about holding at least 10 per cent of the votes on each investee? I can't see that mentioned in what I've linked to prior in this topic. - Perhaps something here just has skipped my attention.

 

My mistake, the 10% threshold, or any size unlisted, is for tax free dividends and no capital gains if you are not an investment company (näringsbetingade andelar). Some "investment companies" are not actual investment companies in legal terms because they are more focused in 10%+ stakes and/or unlisted companies and thus are more tax efficient without the investment company classification. An example of that is Creades, if this has not changed recently.

[John Hjorth]

Thank you for sharing your insights here, alwaysinvert.

[John Hjorth]

alwaysinvert,

 

Based on what you wrote earlier in this topic about the 10 per cent treshold I have tried to follow all links in the tax guidance from Skatteverket to see if I could find anything about it. I was without luck.

 

But I did find this in Annual Report 2015 for Industrivärden AB on p. 53:

 

...  that capital gains on sales of stocks are tax exempt, but in return, a standardized level of income, which amounts to 1.5% of the market value of the equities portfolio at the start of the fiscal year, is taxed. The basis for calculating the standardized level of income does not include businessrelated shares, by which is meant unlisted shares as well as listed shares in which the holding corresponds to at least 10% of the number of votes. In order for listed business-related shares to be excluded from the standardized income calculation, they must have been held for at least one year.

 

I suppose the written there is correct, despite I can't find it in the tax guidance from Skatteverket. So I suppose there is a difference in the tax treatment of investees with regard to standardized income, based on at least 10 per cent voting power in the investee or not.

[alwaysinvert]

You can find it here: https://www4.skatteverket.se/rattsligvagledning/edition/2017.1/331529.html#h-Villkorskraven

[John Hjorth]

Thanks a lot for sharing this, alwaysinvert.

[NewbieD]

Fun thread!There's also Spiltan, which is smallish and unlisted (traded monthly). But has a nice discount to NAV which is mostly composed of a company I like (Paradox entertainment). Also steered by swedens biggest Buffet fan, Per H Börjesson.

[John Hjorth]

Fun thread! ...

 

Thanks, NewbieD!,

 

Yes, it's fun to investigate, but somehow also very cumbersome, and time consuming.

 

Somehow, these Swedish tax regulations in this area for investments undertakings - at least to me - seem to be very attractive. For me and my family, as far as I know - so far -, there is no Danish way to circumvent/defer capital gain taxes on realized stock gains, except by doing this kind of investment, if you're not buing to hold forever.

 

What I'm actually thinking about here, is: "If I bought a basket - so to say - "directly" - to "mirror" i.e. Industrivärden AB portfolio, what would the taxes be on such an arrangement, going forward - long term? [Even without the HQ overhead].

 

My own life expectancy is 23.59 years.

The life expectancy of the Lady of the House is 21.53 years.

 

For me, there is no way directly to compete with this tax arrangement - measured after tax - by i.e. Industrivärden AB or Investor AB - doing their investment moves, without incurring the capital gain taxes, unless I think I can do much better by doing the investments directly.

 

I do not live in some kind of delusion, that I'm better at this - long term - than i.e. the Wallenbergs or Fredrik Lundberg.

 

So, it's - for me - all about trying to weed out - and finding the good ones - among the Swedish investment companies subject to these particular rules.

[Luke]

Very interesting thread, @John Hjorth, how much do you get taxed for Investor AB dividends in your broker/denmark? 

[John Hjorth]

@Luca

 

In taxable accounts :

 

15% withheld by our investment bank. The bank is Swedish [Nordnet] and sends the withheld tax money to the Swedish IRS. By my yearly tax return I get credit for the Swedish tax witheld by the bank. The bank is by Danish tax law liable to report both the divdidends and the taxes withheld directly to the Danish IRS without my participation at all, so those fields in my tax return are automaticly filled in my webinterface to the Danish IRS, I only have to check the numbers, and there have only been few errors during the years, typically under splits, spin-offs and such. So while under the calculation of my taxable global dividend income according to Danish rules, I get credit for dividend taxes paid in Sweden, converted in numbers from SEK to DKK. It's simply soo pleasant to deal with, and no hazzle.

 

And as you can understand from the above, there is no tax leakage here for me. [Tax on dividends here is 27% / 42% on a progessive scale].

 

In tax deferred accounts :

 

Also 15% withheld with the same mecanism for moneyflow and information to the Danish IRS as described above. Here, we are subject to tax deferred accounts consisting of a 15.3% tax on dividends, realized gains and unrealized gains. Just for the humor in it, it's called PAL-tax. Naturally it varies wildly year by year and is now the by far largest tax in our household. The tax is paid by funds in the account on Januar 15^th for prior year. The bank takes out the tax of the account on that date without any notification, so the cash has to be available on exactly that date, or the process is like a margin call. Never tried that though so far. It's a dreadfull experience after a good year to mess around with this and selling stocks in the first two weeks of the new year. I simply hate it. I'm a slow starter at that time of the year, because it's dark as a hellhole outside here when I get up, likely also cold, rainy and windy, and when we reach the midlle of week 1, it all starts with correctional attitude towards my behavior, because I haven't really started doing anything, so I get asked to stop reading whatever I'm reading or to log off CoBF to fix the taxes for the Lady of House.

 

So no tax leakage here, too.

 

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To understand the Swedish taxation of these investment holding companies you need to study a pure play of where no investment is included in a normal line-by-line consolidation. Industrivärden AB is such case to look at to understand it. It provides a degree of tax free compounding I as a Dane can't anywhere else.

Edited June 4, 2023 by John Hjorth

[Luke]

Thanks for sharing @John Hjorth Ill let you know what my broker will do or if i have to send in documents to get the taxes back, i think it will be the latter. 

[Luke]

https://www.woodlockhousefamilycapital.com/post/the-best-businesses-to-own

 

@Spekulatius mentioned chris mayer, this blog post goes a little bit into why sweden is a nice place to invest in. 

 

I didnt know but Mayer also owns Exor, FFH, Fairfax India...

 

https://www.woodlockhousefamilycapital.com/post/woodlock-house-q4-letter

[John Hjorth]

Those companies Chris Mayer is interested in are as such roll-ups, which are not Swedish investment conglomerates in the sense applied in this topic.

[Luke]

31 minutes ago, John Hjorth said:

Those companies Chris Mayer is interested in are as such roll-ups, which are not Swedish investment conglomerates in the sense applied in this topic.

He is invested in Teqnion which is a conglomerate, also mentioned in that blog post. 

 

[John Hjorth]

@Luca,

 

Yeah I know, but this topic is not about Swedish conglomerates in general, but about Swedish Investment Conglomerates, who are applying the special Swedish tax feature of "skabelonindtægt" [translated to English : "Template income"] while investing in listed companies, as I have explained upstream in this topic, where the company gets a deduction in its taxable income for dividends paid to its shareholders, while at same time not subject to tax on  the received dividends from its listed investees.

 

To me, a crazy tax practice, but I'm certainly happy to take advantage of it.

 

Teqnion AB is not such a creature.