The Supreme Administrative Court in February 2020 issued a decision concluding that a refund of withholding tax to non-UCITS investment funds cannot be denied solely by reference to legal form, in particular regarding foreign investment funds that are legal entities that received Swedish-sourced dividends.
The decision applied EU law with regard to refunds of Swedish withholding tax on dividends paid to foreign investment funds in situations comparable to the tax treatment of Swedish investment funds receiving dividends.
The case concerned a U.S. investment fund (a regulated investment company or RIC) that had filed claims for refunds of Swedish withholding tax levied during the years 2006-2008 on dividends distributed from Swedish portfolio shareholdings.
For the years at issue, Swedish investment funds were effectively tax-exempt, in that they were entitled to a tax deduction for dividends paid, while foreign investment funds were subject to Swedish withholding tax on gross dividends received. The U.S. investment fund argued that this difference in treatment was contrary to the free movement of capital in Article 63 of the EU Treaty.
The Swedish tax agency denied the refund claim for withholding tax, and two lower courts also rejected the U.S. investment fund’s appeals. In contrast to previous decisions with similar facts, a lower appellate court found that a foreign (non-UCITS) fund that is a legal entity cannot be regarded as comparable to a Swedish investment fund with regard to whether the dividend withholding tax was levied in a manner contrary to the free movement of capital solely because of its legal form. Note that Swedish investment funds (mutual and special funds) were contractual and lack legal personality.
Appeal to Supreme Administrative Court
The lower appellate court had relied on a 2016 decision, and the U.S. investment fund asserted that the 2016 decision differed from the case at hand because the 2016 decision did not deal with withholding tax or EU law. Futher, the U.S. investment fund asserted that legal form cannot be a deciding factor in the assessment of comparability under EU law.
The Swedish Supreme Administrative Court (SAC) granted partial leave to appeal concerning the question whether the fact that the foreign fund was a legal person meant that the fund, in an assessment under the EU Treaty, was not in a situation comparable to that of a Swedish investment fund with regard to the taxation of dividends.
The SAC agreed with the investment fund and explained that the comments concerning comparability in its earlier decision concerning standardized income taxation of investors under the income tax law, for various reasons, could not be applied to the current situation—which instead must be assessed by reference to EU law and Court of Justice of the European Union case law.
The SAC concluded that when determining whether a foreign taxpayer and a domestic taxpayer are in comparable situations, legal form would only be of importance when it is relevant in relation to the purpose and language of the rules in question. This was not the case as regarding the rules applicable in the case at hand. Thus, the fact that the fund was a legal entity did not preclude the foreign vs. domestic situations from being comparable as regard the taxation of dividends.
Two SAC judges made an additional comment in the decision, clarifying that the same holding would also apply as regarding the current rules (the withholding tax exemption that was effective from 1 January 2012).
The decision conclusively confirms that a foreign investment fund, in relation to withholding tax on dividends, can be regarded as comparable to a Swedish investment fund regardless of its legal form, both under EU law and under the domestic withholding tax exemption. In addition to U.S. RICs, the SAC ruling would appear to have positive implications for other types of foreign investment funds that are non-UCITS and legal entities.
For the last three years, the Swedish tax agency has denied refunds to non-UCITS investment funds that were consider to be legal entities (including U.S. RICs, SICAVs, OEICs), referring to the SAC’s holding in the 2016 case (HFD 2016 ref. 22). Thus, the SAC’s recent decision would be good news for these funds, in that they would no longer be prevented from benefitting from the exemption and would be able to claim a refund (assuming they meet the other requirements under the withholding tax law). As a result of the decision, the tax agency would need to revise its position on the significance of the legal form in a comparability assessment.
The case itself will now be referred back to the lower appellate court for an assessment as to whether the U.S. investment fund is to be allowed a refund of withholding tax plus interest—with this decision to disregard the legal form of the U.S. investment fund and look at it in a situation comparable to that of Swedish investment funds. Tax professionals anticipate that the lower court would revert back to the position taken in its earlier case law (decisions from 2012-2016 and made before the decision in the case HFD 2016 ref.22), in which the court granted refunds of Swedish withholding tax to a number of U.S. RICs and other types of investment funds.
The SAC decision also gives some insights into the comparability assessment under EU law, which may be relevant to other EU law claims generally.
Read a February 2020 report prepared by the KPMG member firm in Sweden.
For more information, contact a KPMG tax professional in Sweden:
Caroline Väljemark | +46 31 61 48 60 | email@example.com
Ann Törner | +46 8 723 96 43 | firstname.lastname@example.org
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