On 15 April, the Supreme Administration Court (HFD) announced a decision implying that a Swedish securities fund has the right to obtain a certificate of residence in Sweden. The outcome of the case means that Swedish funds can now evidence their residence in Sweden in the context of applying double taxation agreements.
The case, which aimed at appealing a decision from the Tax Agency, addressed the question of whether a securities fund has the right to a so-called certificate of residence (a certificate evidencing that the fund has its fiscal residence in Sweden in terms of applying double taxation agreements) from the Tax Agency on the basis of the agreement between Sweden and Spain. The Tax Agency had denied the fund’s request on the grounds that the securities funds are not, according to Chapter 6, § 5 of the Act on Income Tax (IL), liable for tax in Sweden for their income and, therefore, cannot be seen to have their fiscal residence here in Sweden.
According to Chapter 2, § 3, IL, securities funds are treated as legal entities in terms of income taxation. Consequently, the funds are to be seen to be, practically speaking, equivalent to a company and are, therefore, seen to comprise an “entity” in applying double taxation agreements. A securities fund established in Sweden also has such a connection with Sweden as is required for a double taxation agreement to be applicable. A Swedish securities fund’s income is, however, exempt from taxation in Sweden according to Chapter 6, § 5, IL. The question is, therefore, if the fund, in applying the double taxation agreement, is to be seen to be liable for taxes in Sweden and, therefore, has its fiscal residence in Sweden.
HFD noted that the tax agreement between Sweden and Spain does not provide any guidance in this issue. HFD determined, then, that the commentary to OECD’s model agreement states that a number of countries deem that those entities covered by a given country’s tax legislation should also be seen to have their residence in that country even if they are exempt from actual taxation in that country.
HFD subsequently concluded that Swedish securities funds technically incur unlimited tax liability in Sweden and, in spite of the actual taxation now taking place at investor level, do, in fact, comprise tax subjects. In addition, in practice, one tax exempt fund management company had been, according to Swedish law (HFD Yearbook, RÅ, 1996 ref. 84) seen to have their tax residence in Luxembourg on the basis of the double taxation agreement between Sweden and Luxembourg. In this case, it was determined that the coherence in the tax system argued in favour of the fund management company, which did not actually incur taxation in Luxembourg, being seen to have their residence in the country with whom they had such a connection.
Against this background, HFD determined that the interpretation that a Swedish securities fund is to be seen to have their residence in Sweden based on a double taxation agreement is in line with the purpose and goal of such an agreement, and is also in line with previous legal practice.
Comments
This decision has been on the wish list for some time and the outcome is in accordance with the asset management industry’s hopes. This implies that Swedish securities funds can now receive certificates of residence from the Tax Agency to use in conjunction with double taxation agreements with the purpose of reducing the source country’s withholding tax on distributions.
Stefan Carlsson and Alexander Sjöwall
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