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Swedish Rules on WHT: Inconsistent With EU-law


Taxand Sweden has on behalf of foreign investment companies/investment funds applied for a refund of Swedish dividend withholding tax, based on EU law. The Administrative Court of Appeal in Sundsvall ("the Court") delivered a sentence regarding one of our cases on the 15 February. In its judgment the Court concludes that the rules on Swedish withholding tax on dividend payments to foreign investment companies and investment funds are in violation of the free movement of capital. Taxand Sweden reviews the case and highlights why action should be taken by certain foreign investment companies/funds.

Dividend payments to foreign investment companies, that do not have any permanent establishment in Sweden, are subject to Swedish withholding tax at a rate of 30 per cent (the rate may be reduced under an applicable tax treaty). Foreign investment companies, which are tax exempt in their state of residence, cannot credit the Swedish withholding tax.

Swedish investment companies are taxed on dividends received. The dividends are nevertheless exempted in practice, as Swedish investment companies are entitled to deduct dividends paid out. Dividends received by foreign investment companies are consequently subject to chain taxation whereas chain taxation is eliminated with respect to Swedish investment companies. It may be added that investment funds were covered by the same rules until 31 December 2011.

It follows from established case law (see e.g. C.379/05 Amurta) that a member state cannot tax dividend payments to foreign recipients less favourable than dividend payments to domestic entities, given that the entities are in a comparable situation. A number of foreign investment companies and investment funds have based on the above applied for a refund of Swedish withholding tax on EU grounds.

The County Administrative Court in Falun has previously rejected the reclaims arguing, inter alia, that the Swedish rules may be justified by the need to ensure the cohesion of the national tax system.

The Court
The Court concludes that the Swedish rules constitute a restriction of the free movement of capital which in principle is prohibited.

The Court further notes that the need to preserve the cohesion of a tax system, might justify a restriction given there is a direct link between the tax advantage concerned and the offsetting of that advantage by a particular tax levy. An argument based on the need to safeguard the cohesion of a tax system must, however, be examined in the light of the objective pursued by the tax legislation in question.

Dividends received and paid out by Swedish investment companies / investment funds are taxed in the hands of the share / unit holders. The fact that shareholders of a foreign investment company are not (likely) to be taxed in Sweden could, nevertheless not justify a difference in treatment according to the Court. The Court consequently concludes that the Swedish taxation constitutes a restriction of the free movement of capital which cannot be justified by the need to preserve the cohesion of the tax system.

Taxand's Take

The case may still be appealed to the Supreme Administrative Court, and hence the decision may be overhauled. Nevertheless, foreign investment companies/investment funds that are comparable to Swedish investment companies/investment funds should proceed to take action already now and apply for a refund of Swedish withholding tax.

Similar court proceedings are pending in a number of EU countries and companies/funds should review whether to file for a refund of withholding tax in these EU countries.

Your Taxand contacts for further queries are:
Ulrika Grip
T. +46 736 409160

Johanna Dufwa
T. +46 736 409176

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Taxand's Take Author