Swedish SAC: A foreign investment fund’s legal form does not prevent it from using dividend WHT exemption
Swedish SAC ruling on WHT for investment funds
In a ruling on 11 February 2020, the Supreme Administrative Court in Sweden (SAC) has clarified that the circumstance that a foreign investment fund is a legal entity does not rule out that it, when applying EU law to reclaim Swedish withholding tax on dividends, is in a situation comparable to that of a Swedish investment fund.
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The SAC’s decision confirms that refund of withholding tax to non-UCITS investment funds cannot be denied solely by reference to legal form and should be of great importance in particular for overseas investment funds which are legal entities receiving Swedish sourced dividends.
The case concerned a US investment fund (US RIC), which had claimed repayment of Swedish withholding tax levied during the years 2006-2008 on dividends from Swedish portfolio shareholdings. For the years in question, Swedish investment funds were effectively tax exempt, being entitled to a tax deduction for dividends paid, whilst overseas investment funds were subject to Swedish withholding tax on gross dividends received. The fund argued that this difference in treatment was contrary to the free movement of capital in article 63 of the Treaty of the Functioning of the European Union (TFEU).
However, the Swedish Tax Agency (STA) denied a withholding tax refund and the Administrative Court and the Administrative Court of Appeal (ACA) rejected the fund’s appeals. In contrast to their previous decisions with similar facts, the ACA found that a foreign (non-UCITS) fund that is a legal entity cannot be regarded as comparable to a Swedish investment fund in the assessment of whether dividend withholding tax has been levied contrary to the free movement of capital, solely because of its legal form. Swedish investment funds (mutual and special funds) are contractual and lack legal personality. The ACA’s view in this case was the result of a SAC decision in 2016 (HFD 2016 ref. 22) in a case concerning standardized income taxation (Sw: schablonintäktsbeskattning) for investors in investment funds, which commented on the importance of legal form in the assessment of comparability in relation to those rules in the Income Tax Act.
The fund argued that the 2016 case was different from the case at hand, in particular as it did not deal with withholding tax nor EU law, and that legal form cannot be a deciding factor in the assessment of comparability under EU law.
The SAC ruling
The Swedish Supreme Administrative Court granted partial leave to appeal concerning the question “whether already the fact that the overseas fund is a legal person means that the fund, in an assessment under the Treaty of the Functioning of the European Union (TFEU), is not in a situation comparable to that of a Swedish investment fund with regards to taxation of dividends”.
The SAC agreed with the fund and explained that the comments concerning comparability in its earlier ruling, HFD 2016 ref. 22, concerning standardized income taxation of investors under the Income Tax Act, for various reasons could not be applied to the current situation, which instead should be assessed by reference to EU law and Court of Justice of the European Union case law.
The court concluded that when determining whether a foreign subject and a domestic subject are in comparable situations, legal form would only be of importance where it is relevant in relation to the purpose and wording of the rules in question. This was not considered to be the case as regards the rules applicable in the case at hand. Thus, the fact that the fund is a legal entity did not preclude the situations from being comparable as regards taxation of dividends.
Furthermore, two judges made an additional comment in the case, clarifying that the same should also apply as regards the current rules, i.e. the withholding tax exemption in the Withholding Tax Act applying from 1 January 2012.
It is now conclusively confirmed that a foreign investment fund can, in relation to withholding tax on dividends, be regarded as comparable to a Swedish investment fund regardless of legal form, both under EU law and under the domestic withholding tax exemption. In addition to US RICs, the SAC ruling should, in our view, also have a positive impact on the reclaim possibilities for other types of foreign investment funds that are non-UCITS and legal entities.
For the last three years, the STA has denied refunds to non-UCITS investment funds which they consider legal entities (e.g. US RICs, SICAVs, OEICs, etc), referring to HFD 2016 ref. 22. Thus, the SAC decision is welcome news for all such funds, as they should no longer be prevented from benefitting from the exemption and should be able to claim a refund, assuming they meet the other requirements imposed by the Withholding Tax Act. As a result of the decision, the STA should change its position on the importance of legal form in a comparability assessment.
The case itself will now be referred back to the ACA for assessment of whether the fund in question should be granted repayment of withholding tax plus interest on the grounds that the levy of withholding tax infringes article 63 TFEU. To decide whether that is the case it has to be tried whether the fund, disregarding its legal form, is in a situation comparable to the situation of Swedish investment funds. In that regard, we now expect that the ACA will revert back to the position taken in its earlier case law from approx. 2012-2016 (i.e. before the appearance of the case HFD 2016 ref.22), in which they have granted repayments of Swedish withholding tax to a number of US 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.
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