In a recent decision, the Supreme Administrative Court (HFD) determined that a Swedish private person receiving dividends from a non-listed Cyprus company is to be taxed by 25 percent – and not 30 percent- as the Swedish regulations are seen to be in conflict with EU law.
The major rule is that income from capital is taxed by 30 percent. According to Chapter 42, §15a of the Act on Income Tax (IL) only 5/6ths of dividends and capital gains on unlisted shares in Swedish limited liability companies is to be reported for taxation. The tax rate is, therefore, 25 percent (5/6 x 30 percent). In order that this advantageous quota rule is to apply on dividends and capital gains on non-listed shares in foreign legal entities, there is a requirement that the foreign legal entity is subject to income tax comparable with the tax applying to Swedish companies according to IL.
A Swedish private person has reported in their income tax return dividends from unlisted shares in a Cyprus company at 5/6ths of the total value of the dividends. The Cyprus company has been taxed in Cyprus at 10 percent which is the reason the Swedish Tax Agency is of the opinion that the company has not been subject to taxation comparable with the taxation incurred by Swedish companies. As the quota rule is not applicable, the Tax Agency has determined to tax the dividend by 30 percent. The shareholder is of the opinion that the requirement of comparable taxation is in conflict with EU law as this implies a prohibition against the right of free movement of capital, and the shareholder has, therefore, appealed the decision in the Administrative Court in Malmö who has supported the shareholder’s view. The decision was, then, appealed in the Administrative Court of Appeal who decided in favor of the Tax Agency’s interpretation.
The issue which HFD had to assess was whether the requirement of comparable taxation is in conflict with EU law. HFD concluded, as a first stage, that the requirement is in conflict with the right of freedom of movement of capital as dividends from foreign companies to private individuals in Sweden are taxed less advantageously than dividends from companies established in Sweden, which can imply that individuals refrain from investing capital in foreign companies. The next issue was, as a consequence, the assessment as to whether the rule can be justified on the basis of any of the grounds put forward by the Tax Agency and on grounds as found in the Treaty on the Functioning of the European Union or in EU Court practice.
EU practice implies that differing tax rules for foreign and domestic capital income can be justified if the difference in the tax treatment refers to situations which are not objectively comparable. The Tax Agency believes that an individual receiving a dividend from a low taxed company is not to be seen to be in an objectively comparable situation as a person receiving a dividend from a Swedish company. HFD states that the aim with the dividends being reported at 5/6ths of their value is to relieve the economic double taxation of corporate income. Both Cyprus and Swedish companies are subject to double taxation which is the reason HFD, against the background of EU practice, believes that the shareholder receiving the dividend from a Cyprus company can be seen to be in an objectively comparable situation with an individual receiving a dividend from a Swedish company. The requirement of comparable taxation cannot, therefore, be justified on this basis.
The Tax Agency also states that the requirement of comparable taxation should be justified with reference to the purpose of ensuring a well-considered allocation of the right of taxation between member states, and in order to prevent tax avoidance. The first mentioned purpose is not applicable as there is no direct relationship between advantageous taxation of shareholders in Sweden and taxation of companies’ gains in Cyprus. Neither does the latter purpose apply as the requirement is general and is not specifically designed to deal with artificial tax arrangements.
In summary, HFD concluded that the requirement of comparable taxation comprises a prohibition against the right of freedom of movement of capital which cannot be seen to be justified. The dividends which the shareholder received from the Cyprus company are to be reported at 5/6ths of their value and are to be taxed at 25 percent.
Our understanding of the decision is that the requirement of comparable taxation should no longer be able to be seen to apply and that the legislators must, reasonably, change the rule as it has not been supported by HFD. This implies that dividends and capital gains on non-listed shares in foreign legal entities should be treated in the same manner as dividends and capital gains on non-listed shares in Swedish limited liability companies, that is 5/6ths of the value is to be reported for taxation. As the right of free movement of capital also applies to third countries, this should also be seen to apply in relation to companies established in countries outside the EU.
It is less likely that the Tax Agency will, on its own initiative, change any possible decisions regarding previous income years, which is the reason individuals will have to, themselves, request a reconsideration. A request on reconsideration is to have been received by the Tax Agency no later than in the seventh year after the end of the calendar year in which the year of assessment ended. In order that dividends from income year 2011 can be reconsidered, a request on reconsideration is to have been received by the Tax Agency by no later than 31 December 2017.
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