Sweden: The right to judicial review of claims for corresponding adjustments

In the context of transfer pricing, adjustments by a foreign tax authority to a group company’s results can lead to economic double taxation if a corresponding tax adjustment is not made for another group company. A recent ruling by the Supreme Administrative Court of Sweden ensures the right of judicial review of the Swedish Tax Agency’s decision regarding so-called corresponding adjustments under tax treaties.

A foreign tax authority’s correction (increase) of the result of a foreign group company, through a transfer pricing adjustment, may result in economic double taxation if a corresponding adjustment (decrease) is not made in the Swedish group company that is the counterparty in the transaction.

If the general provisions of the Swedish Income Tax Act (in this case, the rules on what constitutes taxable income) are not deemed applicable, the question arises as to whether double taxation can be eliminated under an applicable double taxation agreement (see Article 9.2 in the OECD Model Tax Convention on Income and on Capital) between the states in which the two group companies are taxed. This procedure, following a request for tax reassessment by the Swedish company, represents an important, and sometimes more effective, alternative to a mutual agreement procedure (MAP) between the involved states.

Article 9.2 of the OECD Model Tax Convention on Income and on Capital, which is implemented in most of the tax treaties Sweden has entered into, prescribes an obligation for a contracting state (A) to make a corresponding adjustment in response to another state’s (B’s) transfer pricing adjustment, in certain situations. A prerequisite is that state A considers state B’s adjustment justified in principle and in amount. It is primarily the responsibility of the Swedish Tax Agency to determine whether a corresponding adjustment should be made according to Article 9.2. The provision thus provides an opportunity to eliminate economic double taxation in state A that has arisen due to a transfer pricing adjustment in state B.

In a judgment on January 25 2024, the Administrative Court of Appeal in Stockholm concluded, in cases No. 7076 and 7077-21, that the provisions regarding corresponding adjustments in Article 9.2 of the Nordic Tax Treaty are not for the courts to apply. According to the court, this conclusion was supported by the purpose of the relevant article and the type of considerations that its application entails. Additionally, the conclusion was supported by the provision that the competent authorities of the involved contracting states consult each other as necessary, something a court cannot do, since the competent authority in Sweden refers to the minister of finance or, as per delegation, the authority tasked with handling matters concerning the agreement, which is the Swedish Tax Agency.

The court’s assessment was, therefore, that the Swedish Tax Agency's decision to not adjust the Swedish company's taxation according to Article 9.2 of the tax treaty could not be reviewed by a court. Thus, the Swedish company lacked the right to have a court review of whether the Swedish Tax Agency’s decision was correct regarding the foreign adjustment not being justified. In this way, the Swedish Tax Agency would be the first and last instance in determining whether double taxation should be eliminated under the provision in the tax treaty on corresponding adjustments. Based on this assessment, the court of appeal did not examine whether the foreign adjustment was justified.

However, the Supreme Administrative Court’s judgment on November 25 2024, in cases No. 1348–1349-24, clarified that a court can review an individual’s claim for a corresponding adjustment under Article 9.2 of the Nordic Tax Treaty. The relevant provision is based on Article 9.2 of the OECD Model Tax Convention on Income and on Capital, which is why the ruling should be generally applicable to most tax treaties Sweden has entered into with other states.

Thus, the Supreme Administrative Court has ensured individuals’ access to important legal remedies, in the form of tax treaties, in cases of double taxation due to foreign tax adjustments and because conditions between related parties are not considered at arm’s length.

The ability to present and have a court review of a claim for a corresponding adjustment is an important legal remedy. It is often more effective than attempting to achieve changes in Swedish taxation according to provisions in the Swedish Income Tax Act or through a MAP between the involved states. Therefore, the Supreme Administrative Court’s ruling contributes to ensuring individuals’ legal rights and predictability in the legal system.

The authors, Thomas Andersson and Tobias Almqvist, represented the complainant in the Swedish Supreme Administrative Court cases No. 1348–1349-24.