On 29 July 2024, the Court of Justice of the European Union (CJEU) issued its judgement in CJEU case "KEVA" (Case C‑39/23) between the Swedish Tax Agency and three Finnish public pension funds, regarding the levy of withholding tax (WHT) on foreign public pension institutions.
The CJEU ruled that Swedish legislation that imposes a WHT on dividends paid to non-resident public pension institutions while exempting resident public pension funds violates the principle of free movement of capital of article 63 TFEU.
Background and the CJEU ruling in short
The case concerned the differential tax treatment of dividends paid by Swedish corporations to foreign public pension institutions vis-à-vis those paid to Sweden's general pension funds (GP funds) which are governmental entities, exempt from tax on such dividends in Sweden by virtue of state exemption. The claimants, three Finnish public pension institutions, who are part of the Finnish pension system (occupational pension) on the other hand are subject to Swedish WHT on dividends. The Finnish pension funds are in practice exempted from income tax in Finland.
The Finnish funds applied for a refund of the Swedish WHT suffered in the years 2003 - 2016, referencing to the fact that WHT was levied contrary to the free movement of capital. The Swedish Supreme Administrative Court referred the matter to the CJEU for a preliminary ruling.
The CJEU assessed and reasoned its judgement from a number of different angles, including the objective and purpose of the Swedish legislation, direct comparability, justification by overriding public interests, and legal and operational differences of the pension funds. The CJEU considered that the differential tax treatment of Swedish public pension funds and foreign public pension funds constitutes such a difference in treatment that deters foreign institutions from investing in Swedish companies and which constitutes a restriction on the free movement of capital.
The CJEU ruled that the domestic rules under which dividend distributions to non‑resident pension institutions are subject to a WHT, whereas dividend distributions to resident pension institutions governed by public law are not, are contrary to EU law. The Swedish Supreme Administrative Court will next decide the outcome of the domestic cases based on the CJEU’s ruling.
Commentary from the Finnish perspective
The Finnish claimants consisted of the three pension institutions Keva, the pension fund of the province of Åland and the Central Church Fund:
- Keva is the pension fund which manages the pensions of local government employees in Finland. Its primary task is to manage the occupational pension insurance funds provided for by law. Keva collects pension contributions and pays pensions. It is a legal person governed by public law within the meaning of Finnish legislation and is exempt from tax in Finland.
- The pension fund of the province of Åland is the pension fund responsible for managing the pensions of workers employed by the province of Åland. Its primary task is to manage the funds of the statutory occupational pension insurance scheme. However, it is the province of Åland which is responsible, inter alia, for the payment of employee pensions. The resources of the pension fund of the province of Åland are separate from the budget of the province of Åland. The fund does not have separate legal personality, but is part of the province of Åland. The fund is exempt in part from tax in Finland and does not pay tax on dividends received from public limited companies.
- The Central Church Fund was the Finnish fund for employees of the Evangelical Lutheran Church of Finland until 1 January 2016. It managed the funds paid out under the statutory occupational pension insurance scheme. The payment of retirement pensions on its behalf was managed by Keva. The Central Church Fund does not have separate legal personality, but is part of the Evangelical Lutheran Church of Finland. The Central Church Fund is, in practice, exempt from income tax in Finland.
In Sweden, the pension funds governed by public law are part of the State and benefit from a tax exemption granted to the income of the State. The main task of those pension funds is to manage the capital which constitutes, in part, the income-based old-age pensions and forms part of the Swedish old-age pension. The general old-age pension scheme itself forms part of the public and compulsory social security system.
In its ruling, the CJEU finds that the Swedish Government’s arguments concerning the differences between the Swedish GP funds and the Finnish public pension funds, such as Finnish public pension funds having varying legal forms and the Swedish GP funds not being responsible for collecting pension contributions and paying pensions, does not have a direct link with the (different) tax treatment of the dividends received from Swedish corporations.
The CJEU states that it is apparent that the Swedish and Finnish general old-age pension schemes have the same social objective, the same task and the same type of legal organisation. Their method of financing is identical and they have a similar mode of operation. However, the Finnish pension institutions governed by public law have certain characteristics which differ from those of Swedish pension funds governed by public law in that those institutions have varying legal forms. Furthermore, Swedish pension funds governed by public law are not responsible for collecting pension contributions and paying pensions, although that task is nevertheless carried out by the Swedish public authorities. The CJEU considers that the collection of pension contributions, the payment of pensions and the legal form of the fund concerned do not appear to have a direct link with the tax treatment of the dividends received from Swedish companies. The CJEU finds that the only criterion that possibly could differentiate between pension funds governed by Swedish public law and non-resident pension institutions governed by public law, is the place of residence of the funds and the difference in treatment concerned situation that are objectively similar. The CJEU also finds that the restriction on the free movement of capital cannot not be justified by overriding public interests and thereby rules that the Swedish law constitutes a restriction on the free movement of capital.
The CJEU judgement has been eagerly monitored and awaited in Finland. From the Finnish perspective, the judgement is well reasoned and takes the characteristics, purpose and tax treatment of the Finnish pension institutions into account. The ruling follows the previous case law of the CJEU, and it is an important ruling for the Finnish pension funds, which have significant shareholdings in Sweden. From a broader perspective, the ruling could also be significant for other foreign pension funds and public bodies investing abroad in different Member States.
Withholding taxation of foreign pension operators in similar kinds of situations in Finland
The now published CJEU ruling concerns the Swedish withholding taxation of Finnish pension funds that received dividend income from Sweden. In this context, we would like to also briefly refer to the Finnish tax legislation and Finnish tax treatment in alike situations where a foreign pension operator receives dividend income from Finland.
In Finland, the published case law concerning the Finnish withholding taxation of foreign pension funds is very limited. However, a few years ago the Finnish Supreme Administrative Court issued a ruling (15.11.2022, decision H3272/2022, unpublished) in which it considered a foreign state pension investor tax exempt in Finland, because its operations, including its responsibility to take care of public pension responsibilities, and its legal form were comparable to Keva to such an extent that no objective differences could be found and therefore, the withholding taxation of dividends would have infringed the free movement of capital. The ruling is in line with the now published CJEU judgment in case Keva.
Following the CJEU judgement in case Keva, and when also taking into account the above-described case law of the Finnish Supreme Administrative Court, foreign pension operators should have strong grounds to request for refund of Finnish withholding taxes levied for their Finnish dividend income.
