Swedish investment funds are allowed to deduct distributions to investors, which gives Swedish funds an incentive to distribute their investment return and thereby decrease their tax base. An overseas fund suffers withholding tax without the possibility to obtain such a deduction and there is therefore a difference in treatment compared to a Swedish investment fund in a comparable situation. On this basis, the Court concludes that the Swedish rules restrict the free movement of capital.
The Court states that this difference in treatment is not justified by reference to the cohesion of the Swedish tax system. It is irrelevant in this context that Sweden does not have the taxing right with respect to income which is distributed to investors tax resident overseas. Furthermore, the Court is of the view that this is supported by the preliminary work to the law changes which take effect from 1 January 2012 which exempt Swedish investment funds from tax and give certain overseas investment funds an exemption from dividend withholding tax.
Thus, the Court concludes that the difference in treatment cannot be justified and that the funds are entitled to a refund of the withholding tax suffered.
Comments
The decisions of the Administrative Court of Appeal are a step in the right direction for KPMG’s many investment fund clients which have applied for a refund of withholding tax by reference to EU law. It remains to be seen whether the Swedish Tax Agency appeals the decisions and if so, whether leave to appeal is granted.
The Court of Appeal decisions, which change the decisions of the Administrative Court, are in line with well established case law from the European Court of Justice (ECJ) concerning dividend withholding tax. However, an exactly similar situation has not been specifically tested by the ECJ as yet and from that perspective it is surprising that the court decided not to request a preliminary ruling from the ECJ.
We are also waiting for similar decisions concerning investment funds in third countries outside the EU/EEA from the Administrative Court and Court of Appeal. Furthermore, Court of Appeal decisions for overseas pension funds claiming a refund of dividend withholding tax are also expected shortly.