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New Guideline For Income Consolidation by group contribution to and from Swedish Permanent Establishments

7 Oct 2012

The Swedish Tax Agency has issued a new guideline, dealing with the question of income consolidation by group contribution to, and from, a permanent establishment (p/e) in Sweden (held by a company outside the EEA (European Economic Area)). This new guideline has emerged as a result of a judgment from the Swedish Supreme Administrative Court. Taxand Sweden explores this guideline and the implications it may have for multinationals.

The guideline deals with the question of whether consolidation for multinationals is possible in respect of a group contribution between a Swedish p/e, held by a company resident outside the EEA, but that is a Swedish limited liability company.

As a basis for the conclusions in the official guideline, the Tax Agency has thoroughly analysed the commentary to the anti-discriminatory clause in the OECD model tax convention and it can be expected that the Tax Agency will also argue for this view in other potential anti-discriminatory situations.

The Tax Agency expresses a narrow view on the possibilities for group consolidation, compared to what has been considered as the prevailing view. The conclusion of the new guideline is that a group contribution to a Swedish p/e, held by a company outside the EEA, cannot be deducted. When it comes to group contributions from such a p/e, a deduction can be admitted in a situation under which:

  • The p/e in Sweden is held by a company in a state in which tax residency is based on place of effective management
  • The principle of place of effective management is also applied under the applicable tax treaty.

In all other situations a group contribution is not accepted to, or from, a p/e, held by a company outside the EEA. The explanation for this is shortly described - that the anti-discriminatory clauses in the Swedish tax treaties are not considered applicable.

Given the fact that the Swedish Tax Agency has not clearly expressed its opinion previously, it intends to apply the guideline for the first time from financial years ending later than 31 August 2012.

The background to the official guideline is a judgment from the Swedish Supreme Administrative Court from 5 December 2011 (reg. nr 3130-11). Through the judgment, the court removed an advance ruling by the Swedish Tax Board, in which the Board had presumed that the circumstances for giving / receiving group contribution were fulfilled by the non-discrimination clause. The Swedish Supreme Administrative Court stated that this could not be presumed, instead the advance ruling was removed. In its decision the Court referred to the new commentary to the OECD treaty, Article 24.1. In the new commentaries it is stated that the 'branch rule' in the non-discrimination clause is applicable to the situation of the branch itself, and not to rules applicable on a group of companies, such as group consolidation rules etc.

In the judgment, the Supreme Administrative Court did not answer the question of whether deduction for group contribution could be allowed or not, but only stated that the deductibility could not be presumed. Until the Supreme Administrative Court actually tries the deductibility in a structure relevant for the issue under discussion there remains uncertainty in the current legal situation in this area.

The opinion of the Swedish Tax Agency can be questioned based on previous case law, and the debate that has followed the new commentary's accordance with the OECD convention. Furthermore, the Swedish Tax Agency has not dealt with the question of the importance a tax treaty having been concluded before the revision of the commentaries to the OECD convention.


Taxand's Take

The judgment has raised uncertainty in respect of the prevailing view that, based on previous case law, it was considered as possible to consolidate by group contributions between a company and a p/e in Sweden, held by a company outside the EEA.

Given the uncertainty that follows the judgment from the Swedish Supreme Administrative Court and the statement issued by the Swedish Tax Agency, multinationals with Swedish p/es held by non-EEA residents are recommended to closely monitor the development in case law and carefully analyse the situation before consolidating Swedish p/e with Swedish companies.

It is worth remembering that there is a risk that the Tax Agency may expand its view on the application of the non-discriminatory clauses to other situations, such as transactions between Swedish companies owned by a parent company outside the EEA.

Your Taxand contact for further queries is:
Maria Norlin
T. + 46 736 40 91 95

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