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Supreme Administrative Court Clarifies Tax Treaty Override
How should a conflict between a tax treaty and a conflicting domestic rule be solved?
This question has been heavily debated since a 2008 judgement by the Swedish Supreme Administrative Court. The case concerned whether the Swedish CFC rules could be applied in spite of the tax treaty between Sweden and Switzerland. The Court basically deemed it unnecessary to investigate whether any conflict existed; since the CFC rules had been enacted after the law incorporating the tax treaty into Swedish legislation, the CFC rules should apply in any circumstance.
The 2008 case has caused so much anxiety that Swedish courts in general will apply a so called treaty override if domestic legislation - conflicting with a treaty - is enacted after the treaty itself.
The relationship between domestic law and tax treaties has now been tried again by the Supreme Administrative Court which, in a highly anticipated case concerning the so called 10 year rule, has clarified the matter quite extensively. It is now established - just as before 2008 - that tax treaties should generally prevail over domestic law. Taxand Sweden considers the implications of the tax treaty override on taxpayers.
In the 2008 case the outcome was that the Swedish CFC rules should be applied, disregarding if this was in conflict with the applicable tax treaty between Sweden and Switzerland. As mentioned the Court did not answer the question whether the CFC-rules in fact conflicted with the tax treaty or not, instead it concluded that the internal rule should be applied no matter what, since the internal rule entered into force at a later date than the tax treaty. This is one of the methods normally applied to solve conflicts between competing internal rules. The Court considered that the tax treaty implementation law should be treated in the same way as any other Swedish internal rule, why the same methods were used to solve the conflict between the tax treaty and the CFC-rules.
The newly issued case is an advance ruling on the "ten year rule" which provides that an individual that has moved from and ceased to be tax resident in Sweden is still subject to capital gains taxation in Sweden on the sale certain assets for ten years following the move. After a legislative change in 2007 the ten year rule is applicable also to non-Swedish shares, if such shares were acquired while the individual was tax resident in Sweden. The tax treaty between Sweden and Greece does not allow Sweden to tax capital gains on the sale of non Swedish shares in a situation like this. The Swedish Tax Board issued the first ruling, and referring to the 2008 case, decided to apply the Swedish internal "ten year rule", since this rule entered into force at a later date than the tax treaty between Sweden and Greece.
The Swedish Supreme Administrative Court stated that the principles on how to solve conflicts between competing rules generally still remain the same. However, in this case the Court also stated that a tax treaty in general is superior to Swedish internal law, even though it has entered into force prior to the conflicting internal rule.
This left the Court with a need to explain the outcome in the 2008 case. The explanation was that in a situation where the intention of the legislator, as expressed in the wording of the legislation or the preparatory work, is that an internal rule should overrule an already in-force tax treaty, this should also be respected by the courts; in theory there is no formal or constitutional obstacle for constituting new internal rules that override existing tax treaties. Obviously the Court had interpreted the CFC legislation and its preparatory works such that it was intended to override the tax treaties that may be in conflict with it.
When analysing the ten year rule, the Court found that it was not stated, neither from the wording of the revised version of the "ten year rule" or the preparatory work, that it should be applied if it conflicts with the tax treaty, why the tax treaty was applied. Based on this there was no capital gains tax levied on the sale of the shares which was under trial.
Even though the specific case concerned a sale of shares held by an individual, the outcome of the case is important to take into consideration in all situations where an income tax treaty and Swedish internal law conflicts. The statement made by the Court that a tax treaty should override an internal rule in case of conflict, should be considered as a general statement. This is a very important message for taxpayers who generally rely on the Swedish courts not committing treaty override.
However Swedish and International corporations with activity related to Sweden or Swedish companies, must still be aware of the 2008 case and the implications it may have. Firstly, the Swedish government could issue new legislation intended to override tax treaties. Secondly, the courts may find that an existing internal law is intended to override the tax treaties, and therefore apply the principles from the 2008 case to that rule. In this context it could be worth mentioning that Swedish tax professionals in general wwere very surprised by the principal consequences implied by the Supreme Administrative Court in the 2008 case; it cannot be ruled out that more such surprises are waiting to be unveiled.
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