Nordic tax treaty to undergo judicial review

The Swedish Supreme Administrative Court in November 2024 ruled on a case concerning the elimination of double taxation under the Nordic tax treaty. The key issue was whether administrative courts can review the Swedish Tax Agency's assessments in specific transfer pricing matters.

Background and Legal Issue

A Swedish parent company provided a loan to its Norwegian subsidiary. The interest on the loan was reported as revenue  in Sweden and deducted as an expense in Norway. However, the Norwegian Tax Agency determined that a part of the loan was not priced at arm's length and denied deduction for the part of the interest expense that was not priced in accordance with the arm’s length principle. The Norwegian subsidiary appealed the Tax Agency’s decision in court, but the court upheld the Tax Agency's ruling. As a result, the Swedish parent company and the Norwegian subsidiary became subject to double taxation, as the non-deductible interest expense in Norway corresponded to taxable interest income in Sweden.

The Swedish parent company requested a reassessment- asking the Swedish Tax Agency to make a part of the interest income tax free, thus eliminating the double taxation. According to Article 9.2 of the Nordic tax treaty, the Swedish Tax Agency must make such an adjustment, but only if the adjustment is “justified both in principle and in terms of the amount”.

The Swedish Tax Agency refused to make the adjustment, indicating that the Swedish Tax Agency believed the Norwegian Tax Agency's assessment was incorrect.

The Swedish parent company appealed the decision to the administrative court, which exempted the interest income from taxation. The Swedish Tax Agency then appealed this judgment to the administrative court of appeal.

The administrative court of appeal determined that Swedish administrative courts do not have the authority to review Article 9.2 of the Nordic tax treaty. The court reasoned that this was because the Swedish Tax Agency, acting as a competent authority, had already examined the issue. The Agency's role includes negotiating with tax authorities of other countries to eliminate double taxation.

Finally, the Swedish company appealed the judgment to the Supreme Administrative Court to clarify if individuals can have such claims examined in court.

Ruling of the Supreme Administrative Court

The Supreme Administrative Court ruled that the Swedish Tax Agency must follow the Nordic tax treaty in its regular role as a tax authority. If the Swedish Tax Agency initially finds that the conditions of Article 9.2 of the Nordic tax treaty are not met and this decision is appealed, an administrative court has to review whether the decision is correct.

The Supreme Administrative Court clarified that although the Swedish Tax Agency, in it’s role as a competent authority, can initiate consultations with tax authorities of another country, this does not prevent an administrative court from making a corresponding adjustment.

Our comments

There are two conclusions which can be drawn from the Supreme Administrative Court's ruling. 
The first conclusion is that administrative courts have the authority to review the Swedish Tax Agency's interpretation of tax treaties. This is not unexpected, given that the Swedish Tax Agency itself believed this to be true and supported the company's appeal. Nonetheless, it is beneficial to have this confirmed.

In practice, there are often two ways to eliminate double taxation if the Swedish Tax Agency believes a foreign tax agency has made incorrect transfer pricing assessments. One can either pursue litigation or apply for a Mutual Agreement Procedure (“MAP”).

The second conclusion is that the question regarding if part of the interest income shall be exempt from taxation and thus, eliminate the double taxation, has still not been decided in court. The case was sent back to the administrative court of appeal, which will determine if the Swedish parent company can adjust the interest income since the Norwegian subsidiary was denied the deduction. We will continue to monitor the case.