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Draft Legislation in Sweden on Cross-Border Tax Equalisation – Limits the Scope of Marks & Spencer
On 31 March 2010 the Swedish government presented amended draft legislation on cross-border tax equalisation. The purpose of the amended draft legislation is to align the Swedish rules with the principles set forth in the Marks & Spencer case by the EU Court of Justice. If adopted by the Swedish parliament, the new rules will enter into force 1 July 2010 and apply to deductions in subsidiaries liquidated as of this date. The draft legislation has been heavily criticised for not fully implementing the principles set forth in the Marks & Spencer case. Taxand Sweden examines the knock-on effect for taxpayers.
Swedish companies may profit equalise tax wise by way of group contribution. Thus a Swedish company that transfers funds to another group company is under certain conditions entitled to a tax deduction corresponding to the value transferred, whereas the same amount is taxable for the receiving company. However; the rules do not apply to cross-border transfers, unless contributions are allocated to a Swedish permanent establishment of a foreign company.
The Swedish Supreme Administrative Court has in a number of judgements (dated 11 March 2009) found the Swedish rules regarding group contributions incompatible with the freedom of establishment principle in situations where a Swedish parent company has not been able to utilise 'final losses' in an EEA subsidiary. The draft legislation shall according to the government apply to situations where the existing rules have been found incompatible with the freedom of establishment principle.
The proposed legislation will not replace the existing rules regarding group contributions between entities taxable in Sweden. Instead the government launches a separate system under which a parent company under certain circumstances may deduct 'final losses' that have occurred in a directly held subsidiary resident within the EEA. In order for the losses to be deductible the subsidiary must have been dissolved through liquidation. Also, the losses must have been incurred during a period when the parent company was the holder of at least 90 per cent of the shares. The group must not have any remaining business in the state where the loss making subsidiary was resident.
'Final losses' are defined as losses which the group has not been and will not be able to utilise in the foreign state. The losses will not be regarded as final if there is no legal right for the subsidiary to utilise the losses under the foreign legislation. Hence, losses that have been automatically forfeited due to limitations in time for carrying forward of losses will not be deductible under the rules.
The deductible amount shall equal the losses in the subsidiary calculated according to Swedish and foreign rules. The maximum deduction will correspond to the lesser of these two amounts. Transfers of untaxed value from the subsidiary within a ten year period before liquidation shall reduce the deductible amount. It should further be noted that the deduction must not lead to a net deficit in any Swedish group company.
The draft legislation imposes several conditions which in many cases will make it virtually impossible for the taxpayers to benefit from tax relief in accordance with the judgement in Marks & Spencer. Thus there are clearly still cases where discrimination could arise in comparison to the rules applicable to Swedish companies - the group contribution rules. If the draft legislation is enacted it may well be that the Commission will initiate an infringement procedure against Sweden for failure to conform to EU law.
Meanwhile, for cases that are not within the scope of the draft legislation but still within the scope of Marks & Spencer, we believe there should be room to argue a deduction in court. For any taxpayer it would then be imperative not only to carefully review the restrictions set out in Swedish case law on the subject matter, but also to comply to the extent possible with the conditions laid out in the group contribution provisions; inter alia to transfer funds to the EEA subsidiary matching the relevant losses.
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