CJEU: Swedish withholding tax on dividends to foreign public pension institutions is contrary to EU law

In its decision on 29 July 2024, the Court of Justice of the European Union (CJEU) decided that it is contrary to the free movement of capital to levy withholding tax on dividends from Swedish companies to foreign public pension institutions, while corresponding dividends to Swedish public pension institutions are tax exempt. Thus, the Swedish rules are contrary to EU law and it should be possible for foreign public pension institutions and other similar public investors to request a full refund of withholding tax suffered or receive Swedish sourced dividends without withholding tax.
 

Decision of the CJEU

The case (C-39/23) concerned three Finnish public pension funds receiving dividends from investments in Swedish companies and being subject to Swedish withholding tax. While taxing such foreign funds, Swedish public pension funds (AP funds) are exempt from taxation on dividends by virtue of the state tax exemption, i.e. an exemption from tax for the Swedish state, regions and municipalities. The Finnish funds applied for a refund of the Swedish withholding tax, by reference to the fact that withholding tax was levied contrary to the free movement of capital. The Swedish Supreme Administrative Court requested a preliminary ruling from the CJEU on the matter.

The CJEU stated that this situation, that Swedish public pension funds are exempt from withholding tax while foreign funds are not, constitutes such a difference in treatment that deters foreign institutions from investing in Swedish companies and which constitutes a restriction on the free movement of capital, prohibited, in principle, by Article 63 of the Treaty on the Functioning of the European Union (TFEU).

The CJEU then concluded that the difference in treatment relates to situations that are objectively comparable, which is examined having regard to the objective pursued by the national provisions at issue and to the purpose and content of those provisions. The state tax exemption is intended to avoid a circular flow of public resources of the Swedish State. The CJEU states that this objective could also be achieved while exempting foreign pension institutions from taxation. Furthermore, the CJEU points out that the only relevant distinguishing criterion set out in the Swedish rules on the state tax exemption is the place of residence of the funds, i.e. that foreign public bodies are not covered by the exemption because they are not resident in Sweden. Aspects such as the collection of pension contributions, the payment of pensions and the legal form of the fund concerned do not appear to have a direct link with the tax treatment of the dividends received from Swedish companies and, if so, do not constitute relevant distinguishing criteria. Hence, the fact that the Finnish funds in question differ from the AP funds in these respects does not alter the fact that they are in an objectively comparable situation.

The court finally examined whether the difference in treatment can be justified by an overriding reason in the public interest. The Swedish government argued that the state tax exemption aims to avoid an unnecessarily costly circular flow of public resources and ensure Swedish social policy goals. However, the Court found that administrative disadvantages are not alone sufficient to justify a restriction and that the need to ensure a balanced allocation of taxing rights between Member States cannot be used as justification when, as in this case, the Member State has chosen not to tax its own funds.

Thus, the CJEU found that the Swedish legislation constitutes a restriction on the free movement of capital, which is precluded under Article 63 TFEU. The difference in treatment between domestic and foreign public pension funds concerns situations that are objectively comparable and cannot be justified.

Following the CJEU’s decision, Sweden is required to adapt its legislation in such a way that foreign public pension institutions are exempt from Swedish withholding tax. At the same time, such funds can already now apply for a refund of withholding tax by reference to the principles established by the CJEU in its decision. Particularly interesting is that comparability criteria such as the collection of pension contributions, the payment of pensions and the legal form of the fund concerned do not constitute relevant distinguishing criteria and are not required for comparability in this context. Hence, there could be no requirement that a foreign public pension institution must correspond in detail to the function, purpose and organization of the AP funds in order to be considered objectively comparable.

The decision results in a need for a change compared to how these cases have previously been decided by the Swedish Tax Agency and Swedish courts, not only with regard to public pension institutions but also other public bodies where a difference in treatment has so far been maintained by Swedish courts by reference to lack of comparability due to the objective of the state tax exemption being to avoid a circular flow of public resources of the Swedish State. This argument was now not accepted by the CJEU, meaning that it can be argued that previous Swedish court decisions should be reconsidered. Considering that the Swedish state tax exemption covers more than merely pension institutions, the ruling could possibly be extended to other types of state and municipal investors, such as central banks, sovereign investment funds and municipalities.

For Sweden to introduce a 'sovereign exemption' for foreign states, something which many countries already have, may be a potential solution to ensure that Swedish legislation is compatible with the free movement of capital.

The Swedish Supreme Administrative Court will now decide the case based on the judgment of the European Court of Justice.

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Hanna Harling
Skatterådgivare
KPMG i Sverige
+46 72 394 64 62
hanna.harling@kpmg.se