Under Swedish domestic tax law, the Swedish Government and its foreign equivalents are exempt from taxation meaning that dividends paid from Swedish corporations to Swedish public pension funds are tax exempt. The Swedish Tax Agency has however been of the view that foreign public pension funds are not objectively comparable to Swedish public pension funds, why their requests for refunds of withholding tax on dividends historically have been rejected. This difference in treatment was challenged by three Finnish pension funds and has now been tried before the CJEU, which confirmed that the Swedish system is discriminatory and contrary to EU law.
Background
According to the Swedish Income Tax Act (the ITA) (1999:122), the Swedish Government is exempt from taxation. Consequently, dividends received by Swedish public pension funds (GP funds) are tax exempt.
KEVA is a Finnish public pension fund which is exempted from tax in Finland. From 2003 to 2016, KEVA and two other Finnish public pension funds received dividends from Swedish companies. These dividends were subject to withholding tax (WHT) in Sweden, although the terms and expressions used in the ITA are supposed to cover any foreign equivalents. The three Finnish public pension funds applied for refunds with the Swedish Tax Agency (the STA) and argued that levying Swedish WHT was contrary to the free movement of capital according to Article 63 TFEU. The STA rejected this application citing that the complainants were not in an objectively comparable situation to the Swedish GP funds. The three Finnish public pension funds together appealed the STA’s decision to the Swedish Administrative Court as well as the Swedish Administrative Court of Appeal. However, both courts ruled in favor of the STA. In January of 2023, the case reached the Swedish Supreme Administrative Court which in turn applied for a preliminary ruling from the CJEU.
The case before the CJEU
The CJEU initially stated that while Article 63(1) TFEU contains a general prohibition against restrictions on movements of capital between Member States, differences in treatment may be allowed if a restriction relates to situations which are not objectively comparable or if there is a reason relating to the public interest which overrides the difference in treatment.
The Court then swiftly established that the Swedish rules on WHT constituted a restriction of the free movement of capital as the difference in treatment might deter non-resident pension institutions from investing in companies established in Sweden.
The Court continued by assessing whether this difference in treatment concerned two objectively comparable situations. The Swedish Government, which had been given the opportunity to submit a written observation, had argued that the aim of the rule in Paragraph 2 of Chapter 7 of the ITA (which exempts the Swedish GP funds from taxation) is to avoid a circular flow of public resources of the Swedish State and that the exemption therefore promotes the stability and viability of the Swedish pension scheme. The Swedish Government’s argument was that since it is not the Finnish public pension funds’ aim to promote the financial stability and durability of the Swedish social security system, they were not in an objectively comparable situation to the Swedish GP funds. Advocate General Collins had already in his opinion expressed that such a comparison was unduly restrictive, a view which was ultimately shared by the Court. Instead, the Court emphasized the fact that the Swedish GP funds and the Finnish public pension funds all share the same social objective, have the same function and same type of legal organisation. Furthermore, their methods of financing are identical, and they have similar modes of operation. The Court stated that the differences between the Swedish GP funds and the Finnish public pension funds that had been highlighted, 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, did not have a direct link with the (different) tax treatment of the dividends received from Swedish corporations. Thus, the Court found 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, was the place of residence of the funds. It was therefore the Court’s conclusion that the difference in treatment concerned situations that were objectively comparable.
Lastly, the Court assessed whether this restriction on the free movement of capital could be justified by overriding reasons relating to the public interest. The Swedish Government had claimed that a potential restriction could be justified by, (i) the need to safeguard the Swedish social policy objective and its financing and, (ii) the principle of territoriality combined with the need to preserve a balanced allocation of the powers between the Member States as regards the general income-based old-age pension scheme. The Swedish Government elaborated its first point by stating that taxation of the GP funds would mean that the Swedish Government would be required to allocate the corresponding tax revenue to the GP funds in the annual budget in order for the GP funds not to use their own funds to finance that tax. Further, the Swedish Government argued that the exemption from taxation enjoyed by the Swedish GP funds made it possible to avoid an unnecessarily costly circular flow of public resources. In regard to its second point the Swedish Government argued that a Member State has the right to tax income generated in its own territory according to the principle of territoriality and that EU law does not require Member States to contribute to the financing of general national old-age pension schemes of other Member States.
However, the Court was quick to dismiss both arguments of overriding reasons in the public interest. Concerning the Swedish Government’s argument that an exemption for the GP funds helped avoid a circular flow of public resources, the Court stated that according to CJEU case law, administrative disadvantages are not alone sufficient to justify a restriction of the free movement of capital. Regarding the Swedish Government’s argument of the need to preserve a balanced allocation of the power to tax between Member States, the Court stated that a Member State which has chosen not to tax resident funds on their domestic income, cannot rely on the need to ensure a balanced allocation of the power of taxation between Member States to justify the taxation of non-resident funds receiving such income.
In accordance with the above, the Court found that the Swedish legislation constitutes a restriction on the free movement of capital and is discriminatory of non-resident public pension funds. The Court ruled:
“Article 63 TFEU must be interpreted as precluding legislation of a Member State under which dividends distributed by resident companies to non-resident pension institutions governed by public law are subject to a withholding tax, whereas dividends distributed to resident pension funds governed by public law are exempt from such a withholding tax.”
Svalner’s comment
The ruling from the CJEU will hopefully provide an increased incentive to invest in Swedish corporations, not only for non-resident public pension funds but other foreign public institutions that could potentially be covered by the Government tax exemption in the ITA. Svalner looks forward to following the continued process as the KEVA case will now be tried before the Swedish Supreme Administrative Court. Svalner looks forward to a ruling by the Swedish Supreme Administrative Court in the national case which is in accordance with the CJEU’s ruling.
As a result, non-Swedish public pension funds as well as other non-Swedish public entities which have suffered withholding tax in Sweden may be entitled to refunds. However, a five-year limit applies to such applications and thus, an application for a refund must be submitted to the Swedish Tax Agency within five years from the year the dividends were received. Svalner is happy to assist with both the material assessment as well as the procedure with the Swedish Tax Agency for non-Swedish public pension funds or other public institutions that have suffered Swedish withholding tax and want to assess the possibility of a refund. If you have any questions concerning Swedish WHT, you are welcome to contact Svalner’s team specialized in international corporate taxation.
If you wish to discuss these topics, please contact:
Svalner Skatt & Transaktion KB
