Nobel’s Tax Domicile and Future of Prizes Tied to Horse Stables

By: William Hoke

Horses are often raced for prize money. A far more prestigious set of prizes might never have materialized if a French court hadn’t ruled that Alfred Nobel’s tax domicile depended on where he stabled his horses.

The 2022 Nobel Prize in medicine was announced October 3, with the remaining five prizes to be disclosed over the following week. The prize for each field is accompanied by the award of SEK 10 million (around $900,000), with the original funding for all but one of the prizes coming from the estate of the Swedish chemist and inventor of dynamite, who died in Italy in 1896. Nobel left a fortune consisting largely of cash, shares in dynamite and mining companies, and royalties from international patents.

Under the terms of Nobel's will, relatives of the childless bachelor were to receive only around one-half of 1 percent of Nobel’s estate. The handwritten document, which reportedly was prepared without legal advice, was short on detail. It stated that the remainder of Nobel’s assets should be invested in a fund, with the interest used to award prizes to those who conferred the greatest benefit to humankind in the fields of chemistry, literature, medicine, and physics, and in fostering peace between nations. (The prize for economics was added in 1968 and is funded separately.) There was no foundation set up to administer the estate. More importantly, it didn’t clear up the question of his legal residency.

According to the Norwegian Nobel Institute, which assists the committee that awards the Nobel Peace Prize, the executor of the estate, Ragnar Sohlman, had to overcome both legal and logistical obstacles in carrying out the wishes of the deceased. “The bulk of Nobel's securities and cash reserves was deposited in French banks in Paris, which could make it difficult for the estate to gain control of the assets without becoming subject to French inheritance tax,” it said. “Sohlman solved the problem by single-handedly and in complete secrecy taking the securities out of the country — reputedly with a loaded pistol in his coat pocket just in case.”

Because Nobel had lived in France for most of the 20 years before his death, there was a question whether his estate was subject to French law and the country’s inheritance tax. Some of the inventor’s Swedish relatives — purportedly disappointed that they were left out of the will — filed suit in 1898 to annul it, arguing, among other things, that Nobel wasn’t a resident of Sweden in the years just before his death. A lawyer hired by the executors convinced a French court that Nobel’s residence was near Bofors, Sweden, largely because the inventor had moved his horses there in 1894.

“Making Sweden the legal domicile was important, as this meant both that Swedish law applied to the will and that any objection thereto had to be presented in Sweden, but also that taxes on the estate should be paid in Sweden,” New York-based lawyer Elin Hofverberg wrote in a 2015 article published by the Library of Congress.

Michael Sohlman, the grandson of Ragnar Sohlman, told Tax Notes that his grandfather’s decisive move was to secure Nobel’s assets and spirit them out of France. “With a warrant showing him being an executor of Nobel's will, he managed to collect all shares, etc., and send them to safety in Scotland," thanks to the Rothschild bank office at the Gare du Nord train station in Paris, he said in an email.

The younger Sohlman, a former minister of industry and finance in Sweden who was executive director of the Nobel Foundation from 1992 to 2011, said that if Nobel’s assets had remained in France, the world-renowned prize structure might have been stillborn. ”The answer is very likely the bequest would have been either nullified or substantially diluted in the quagmire of the French jurisprudence,” he said.

In 1898 Nobel's relatives agreed to drop their legal challenges in return for a 6 percent cut of his estate. The settlement also provided that the prizes must be awarded at least every five years, that the cash awards must be for at least 60 percent of the interest earned by the fund, and that each prize could be divided into no more than three parts.

Income Versus Inheritance Tax

Sohlman said the Nobel Foundation was set up as part of the compromise arranged by his grandfather among Nobel’s relatives, the executors of his will, and the various institutions that award the prizes. He said the foundation was subject to Swedish income tax, which proved much more problematic than any inheritance tax. ”The exact reason for the foundation not being granted tax-free status as a public utility I do not remember,” he said. It was ”probably that literature — one of the ’Nobel disciplines’ — wasn't considered of equal value to prizes for scientific achievements, or that the prize awards would mostly go to foreigners. The foundation was for many years the biggest taxpayer in town," he added.

Although Swedish law at the time subjected the income of foundations to tax, "in 1946 a tax committee found the Nobel Foundation to be so unique in comparison to other foundations — it was even emphasized that it was equal to academia and other educational institutions — that it qualified for a more beneficial tax treatment,” said Yvette Lind, a professor of law at Copenhagen Business School. “As a result, the Nobel Foundation was . . . relieved from all taxation, with the exception of property taxes.”

Both France and Sweden taxed inheritances at the time of Nobel’s death. Daniel Waldenström, a professor of economics at the Research Institute of Industrial Economics in Stockholm, said that in 1896 Sweden imposed a 1.5 percent tax on assets inherited by the children of the deceased and a 6 percent tax on others.

Marilyne Sadowsky, a professor of tax law at Sorbonne Law School/University Panthéon-Sorbonne, said that from 1798 to 1901, French inheritance tax rates varied between 0.5 percent and 9 percent, depending on the value of the assets, whether they were real or personal property, and the relationship of the heirs to the deceased. “The rule was that there was no duty to be paid on property outside France,” she said in an email. “Therefore, if he had only horses (and no real estate) and his domicile was abroad, the tax did not have to be paid in France. In addition, the time limits for the registration of deeds and declarations by heirs varied according to the continent of the place of death when the deceased died outside France.”

Sadowsky said that because financial investments were classified as movable property, they normally would have been declared at the deceased’s place of residence. “However, a specific law of June 29, 1872, created for the first time a tax on capital of 3 percent (and then 4 percent in 1890) on bond interest and dividends and other corporate income and shares, except for interest on debts and state annuities, paid at source by the companies and institutions paying the income,” she said. “Proceeds from foreign securities were only taxable when the company issuing them had a place of business in France or had its securities listed there.”

Hofverberg said Sweden’s Supreme Court ruled in 1899 that Nobel’s property in France could be taxed by both the Swedish and French governments. “However, the Court did allow the executors of the will to deduct the amount they had paid in foreign taxes on Nobel’s property in France, the same way any other debt from the holdings of the estate could be deducted,” she said.

Waldenström said a Swedish deduction for French taxes sounded plausible. “During this first globalization era, Swedish authorities were quite aware of continental tax systems and the fact that many Swedes had engagements abroad,” he said.

Estimating the current value of the approximately SEK 31 million dedicated for the prizes at the time of Nobel’s death is difficult. Magnus Henrekson, a professor of economics at the Research Institute of Industrial Economics, said that using current exchange rates would value the bequest at around $200 million. “A much better estimate will be obtained by relating it to the annual salary of a worker,” he said. “The average annual salary of a Swedish production [worker] was SEK 596 in 1896 and is now roughly SEK 500,000. But SEK 31 million in 1896 corresponds to 52,000 annual salaries in 1896; 52,000 annual salaries in 2022 adds up to SEK 25 billion rather than SEK 1.7 billion, which sounds far more plausible.”