Sweden: Are non-Swedish pension funds discriminated under EU law when liable to Swedish withholding tax?

Erik Hultman		Niklas Cornelius

The European Court of Justice (ECJ) has in repeated rulings established that it is contrary to the free movement of capital to levy withholding tax (WHT) on dividends when dividend income received by a domestic comparable person/entity is not subject to a corresponding tax burden.

A number of non-Swedish pension companies and pension funds have initiated court procedures in Sweden in order to reclaim Swedish WHT. The claims are based on the case law developed by the ECJ.

Under Swedish tax legislation, dividends to foreign pension companies and pension funds are subject to WHT on the gross amount, while Swedish pension institutions (life insurance companies and pension trusts) are in effect subject to a specific tax paid on a notionally calculated yield, based on the government interest borrowing rate and the value of the funds' assets, after a deduction of financial costs. As a result, the effective tax rate on dividends received by these resident pension institutions may from time to time be lower than the 15% withholding tax rate that is normally applied to non-resident pension funds. It is worth noting that according to Swedish legislation, non-resident pension companies and funds are subject to WHT on dividends. The domestic WHT rate amounts to 30%. It may generally be reduced to 15% or 10% under Swedish tax treaties.

It is clear that from an EU law perspective it should in principle be allowed for member states to use different techniques for taxation depending on the domicile of the taxpayer. It seems reasonable, however, to believe that this is only valid if the outcome is not discriminatory. The result of the different taxation techniques in Sweden for domestic and foreign pension institutions is, however, somewhat difficult to assess as it will vary from year to year and also depend on what the normal general interest rates should be considered to be.

The European Commission has requested that Sweden amends its WHT legislation with respect to foreign pension funds. The last request, which took the form of an additional reasoned opinion (the second stage of an infringement procedure) was issued on March 22 2012. The Swedish Government has, however, defended the Swedish levying of WHT on dividends paid to foreign pension companies, arguing, inter alia, that the tax burden of Swedish domestic life insurance companies over a longer period of time, and under more normal general interest rates, can be expected to be at least as heavy as the WHT burden that non-Swedish pension funds are subject to.

The Swedish Supreme Administrative Court released notifications in June 2013 that it will grant leave of appeals for cases filed by a Finnish pension company and a Belgian pension fund, respectively.

The outcome of the cases should be of interest for many non-Swedish financial institutions whose Swedish equivalents are taxed on a notionally calculated yield, as favorable rulings may create WHT reclaim opportunities.

Erik Hultman (erik.hultman@se.ey.com)

Tel: +46 8 520 594 68

Niklas Cornelius (niklas.cornelius@se.ey.com)

EY

Website: www.ey.com