Sweden: Important case law developments regarding withholding tax and the free movement of capital
Erik Hultman and Niklas Cornelius, EY
The European Court of Justice (ECJ) has in repeated rulings established that it is contrary to the free movement of capital as stipulated in article 63 of the Treaty on the Functioning of the European Union (TFEU) and article 40 of the EEA to levy withholding tax on dividends when dividend income received by a domestic comparable person/entity is not subject to a corresponding tax burden.
A number of non-Swedish investment funds have in the wake of the ECJ case law challenged the Swedish rules on withholding tax on dividends.
Before January 1 2012, Swedish investment funds were taxed on dividends received but were allowed a deduction of an amount equaling any distributed profits. This meant that Swedish domestic investment funds generally did not pay any tax. Non-Swedish investment funds were, however, in general liable to withholding tax of 30% on dividends from Swedish companies.
To make the Swedish tax rules for investment funds more competitive, the tax liability for Swedish investment funds was abolished from January 1 2012 and instead the investors are taxed on a standardised basis. Foreign investment funds qualifying as investment funds under Swedish law were granted the same exemption.
Beginning in around 2005 the Swedish Tax Agency started to receive refund claims based on EU law, with most claimants being European investment funds. When reviewing the claims the Swedish Tax Agency, however, took the stance that the Swedish rules on withholding tax did not constitute a breach of the free movement of capital, alternatively that the different treatment anyway could be justified. Consequently, the Tax Agency refused repayments.
The EU claims have since then been processed through the Swedish judicial system until an important milestone was reached on May 20 2013 when the Swedish Supreme Administrative Court refused an appeal by the Swedish Tax Agency concerning a ruling from the Administrative Court of Appeal in which a Luxembourg SICAV (UCITS) had been granted a refund of withholding tax. The Administrative Court of Appeal stated in its ruling that a foreign fund which is not able to claim a deduction for re-distributed earnings is treated less favourably than a Swedish investment fund in a comparable situation and that the Swedish rules on levying of withholding tax on foreign funds thereby infringed the free movement of capital. Further, the court noted that the difference in treatment could not be justified.
The decision from the Supreme Administrative Court to refuse leave of appeal meant that the earlier ruling was upheld. Consequently, the Swedish Tax Agency has had to amend its view and has begun to initiate repayments to several claimants.
Reach of the recent case developments
It appears clear that all UCITS compliant funds should be considered as comparable to Swedish investment funds and thus eligible for refunds of paid withholding tax. Hopefully the recent developments will soon be followed by case law from higher courts regarding other types of investment funds, for example American mutual funds.
Erik Hultman (email@example.com)
Tel: +46 8 520 594 68
Niklas Cornelius (firstname.lastname@example.org)