Proposal for new Swedish law for withholding tax on dividends
On April 29th, the Swedish ministry of finance circulated a referral for consultation to enact a new law for withholding tax on dividends. If the proposal is implemented in Swedish law, the current Withholding Tax Act will be replaced in 2022.
A public enquiry and general oversight of the current Swedish withholding tax legislation was initiated during 2017, with the purpose to present an effective, modern and predictable regulation compatible with EU law. The circulated referral presents the enquiry’s conclusions and proposals.
According to the current legislation, withholding tax is levied on dividends on shares in Swedish companies, UCITS funds and special funds that are owned by non-resident shareholders. The tax rate is 30 percent but often reduced under the applicable double taxation treaty.
The referral includes alterations that could affect the determination of who and what that should be subject to withholding tax on dividends. The law is generally proposed to enter into force on July 1st 2022, except for certain rules concerning approved intermediaries that are suggested to enter into force six months earlier to enable applications and timely approvals of intermediaries.
Withholding tax liability
It is proposed that the current wording ”entitled to dividend” (Sw. utdelningsberättigad) should be amended to “beneficial owner”.
According to the preparatory works to the current regulation, “entitled to dividend” should be presumed to coincide with the persons listed in the share register of the dividend distributing company. Secondarily, the term should be interpreted from a civil law perspective.
The proposal suggests to implement the “beneficial owner” concept in accordance with its meaning in the OECD model tax convention. The current connection to Swedish civil law should thereby be removed. The reasoning behind the suggestion is that withholding tax only applies in relation to cross border payments. The proposal emphasizes that the introduction of the beneficial owner concept should result in a less legalistic interpretation that will need to be assessed in light of the purpose of the tax treaties (i.e. to avoid double taxation and counteract tax erosion).
Expansion of the Swedish Tax Avoidance Act
According to the proposal, the current general anti-avoidance rule, or “decoy rule”, in the Swedish Withholding Tax Act does not prevent abuse of the benefits in the Parent Subsidiary Directive as intended. The application of the rule in case-law appears to be held back by the historical connection to pure decoy cases.
The principle that EU member states should deny the tax relief provided in directives in situations where taxpayers use directives for abusive or fraudulent purposes, even when there is no domestic law targeting such abuse is mentioned in the proposal. The principle can be derived from the CJEU judgements in the Danish beneficial ownership cases (C-116/16 and C-117/16) from February 2019. Please refer to this article for further information.
With the recent EU development and the lack of effectiveness in the current legislation, the application of the Swedish Tax Avoidance Act is proposed to be extended to include withholding tax.
Special tax liability in abusive situations
To prevent circumvention of the proposed rules through the use of manufactured dividend or so called cum-cum schemes, a special rule on tax liability is proposed to apply in connection with applying the Swedish Tax Avoidance Act or when the beneficial owner of the dividend is not the same person as the recipient of the dividend. In such cases, the recipient would be liable to withholding tax.
The rules should only be applied if determining the tax liability under the ordinary rules would result in no net taxation of the dividend in Sweden. The proposal is in principle the current covey rule adjusted into a more objective shape.
A possibility to let another entity than the distributing company or fund assume the responsibility to withhold, declare and pay withholding tax is proposed.
The Swedish Tax Agency would be the determining authority for approving central securities depositaries, registered trustees in Sweden and some foreign equivalent figures as approved intermediaries. The Tax Agency would as a part of such approval, ensure that the applicant is suitable for the task based on economical and other relevant circumstances. In case the applicant is foreign, the Swedish Tax Agency is recommended to consult the Tax Agency in the resident state.
Other differences compared to the Swedish Withholding Act
- The procedural parts of the Swedish Tax Prodcedure Law (Sw. Skatteförfarandelagen) will be applicable
- The timeframe for payment and declaration of the withheld tax is amended to two months instead of four months as currently
- To be granted a relief at source, the declaration must include individual information regarding the persons liable for tax
- The rules for tax liability should no longer tie to a restricted number of individuals and instead apply to the beneficial owner as such
- Certain rules should apply to distributions in kind where the main difference is that the distributed assets can be withheld until the tax has been paid
The exception for foreign UCITS funds and special funds
The current exception for withholding tax for foreign UCITS funds and special funds is proposed to be maintained without adjustments. The proposal suggests that the Swedish Tax Agency should publish preliminary and typical case assessments related to some commonly occurring foreign subjects, to simplify the interpretation of the rules.
A reformation of the Swedish Withholding Tax Act, that was implemented during the 1970’s, has been expected for a long time due to the internationalization. A good example of such is the CJEU’s beneficial ownership cases from 2019 that lead to an increased uncertainty regarding in which cases withholding tax should be levied. The uncertainty as such is expected to remain, at least until there is a new domestic legislation in place. The consultation responses should be submitted to the Swedish Ministry of Finance no later than August 14th 2020.
In summary, the proposed amendment of the Swedish legislation and the international developments provide good reasons to keep track on the development of withholding tax going forward.