The Swedish Supreme Administrative Court has, in two separate judgements, ruled that two foreign pension funds were not entitled to restitution of Swedish withholding tax based on the EU-law principle of free movement of capital. The foreign pension funds were not deemed to be in comparable situation to that of Swedish pension funds.
The Swedish Supreme Administrative Court (“SAC”) has tried the issue of whether a foreign pension fund should be deemed to be comparable to a Swedish pension trust (Sw: pensionsstiftelse), a Swedish life insurance company (Sw: livförsäkringsföretag) or a Swedish governmental pension fund (Sw: allmän pensionsfond), and thus entitled to restitution of Swedish withholding tax (“WHT”) in two separate judgments issued on 22 February 2017. The SAC came to the conclusion, partly based on the preliminary ruling in case (C-252/14) from the EU Court of Justice (“CJEU”), that the foreign funds were not in comparable situation to that of Swedish pension funds when applying the legislation. Consequently, the levying of WHT was not contrary to the EU-law principle of free movement of capital. However, the funds may be allowed to deduct certain costs directly connected to the receipt of the dividends on which the WHT was levied if such costs can be proven.
A Finnish pension fund (the “Finnish Fund” or the “Fund”) applied in 2007 for restitution of WHT with the Swedish Tax Agency (“STA”) with reference to the EU-law principle of free movement of capital. The Finnish Fund argued that it should be deemed comparable to the Swedish governmental pension funds, the AP funds, which are exempt from income tax in Sweden as being a part of the Swedish state. The STA denied the Fund’s claim and the Fund appealed the decision. The SAC was thus to try the issue of whether the Finnish Fund could be deemed comparable to the Swedish AP funds.
In its adjudication the SAC states that there are similarities between the Finnish employment pension insurance system and the Swedish income-based pension system. Both insurances are mandatory and based on a system whereby the payment of pensions are financed by annual contributions from employers and employees. Both the Finnish Fund and the AP funds manage funded capital belonging to the respective pension system. The SAC continues, however, and states that there also are significant differences between the activities that the Finnish Fund and the AP funds conduct:
- The Finnish Fund, which is a limited liability company, commits pensions to workers through contracts with their employers and is responsible for the pension commitments as well as the handling of pension payments.
- The AP funds do not have any similar purpose. With the exception of a small portion of the funds derived from the premium pension part, the AP funds' main task is to manage capital which is to act as a buffer in the pension system. The AP funds thus act as stability funds for the pension system with no direct connection to the pension obligations.
The SAC thus concluded that the Finnish Fund and the AP funds operate under different conditions both organisationally and in terms of function and purpose. Consequently, the Finnish Fund was not deemed to be in an objectively comparable situation to the AP funds. This implies that it cannot be considered contrary to the EU principle of free movement of capital to levy WHT on dividends from Swedish companies to the Finnish Fund.
It should be noted that the SAC took the CJEU’s ruling in consideration and stated that the Finnish Fund could potentially be entitled to a deduction of costs incurred in direct connection with the receipt of the dividends on which the WHT was levied, c.f. below. The case was thus remitted back to the STA as regard the claim of deduction for costs.
A Dutch pension fund (the “Dutch Fund” or “the Fund”) applied in 2007 for restitution of WHT with the Swedish Tax Agency (“STA”) with reference to the EU-law principle of free movement of capital. The Dutch Fund argued that the yield tax which Swedish pension trusts and life insurance companies are charged, instead of income tax, is more favourable compared to the levying of WHT and that this was not a justifiable discrimination. The STA denied the Fund’s claim and stated that there were no discriminatory treatment. The Fund appealed the decision.
The SAC requested a preliminary ruling from the CJEU when the case was appealed to the court. The CJEU ruled that the Fund was not in comparable situation to that of Swedish pension trusts or Swedish life insurance companies and that it therefore was no discrimination. The CJEU however added that a deduction of costs incurred in direct connection with the receipt of the dividends should be allowed, if such deduction is possible for Swedish pension trusts and Swedish life insurance companies.
In the judgement the SAC refers to the CJEU’s ruling and concludes that the Dutch Fund is not in a comparable situation to a Swedish pension trust nor a Swedish life insurance company.
Furthermore, the SAC states that the Dutch Fund could not be deemed comparable to a Swedish governmental pension fund, a secondary ground for restitution made by the Fund in its appeal to the SAC. The reason is, according to the SAC, that the Fund does not share the same organisational structure nor the same function and purpose as Swedish governmental pension funds.
Consequently, neither the Dutch Fund was deemed entitled to restitution of WHT by the SAC. As for the Finnish Fund, the SAC stated that there may be deductible costs incurred by the Dutch fund in direct connection with the receipt of the dividends on which the WHT was levied and remitted the case back to the STA in that respect, c.f. below.
Deduction of costs
The SAC states in the judgments that costs incurred in connection with the acquisition of the shares, cost for financing the shares or costs for management of the shares cannot be such costs that can be deemed to have a direct connection with return in the form of dividend. Such costs can therefore not be deducted from the basis for the WHT. According to the SAC, it can however not be excluded that it in exceptional cases may be costs that fulfils the requirement of such connection.
As mentioned above, the SAC has therefore, in both cases, remitted the claims regarding deduction of costs incurred in direct connection with the receipt of the dividends to be tried by the STA. The reasoning behind the remittance was that this question had not been tried by the STA or lower courts and that the SAC should not be the first instance to try the issue.
The judgements should in principle close the door for foreign pension funds to get full restitution of Swedish WHT based on EU-law principles unless it is a governmental pension fund with a very similar organisational structure, function and purpose as the Swedish governmental pension funds.
Whether some reduction of the WHT can be achieved through deduction of costs is still a somewhat open issue.
You are most welcome to contact us for more information regarding the possibilities of applying for repayment of withholding tax and it shall be noted that the situation for e.g. investment funds is different compared to pension funds.
Daniel Glückman and Alexander Sjöwall
010-212 91 77
+46 10-212 91 77