Revised proposal for a new Swedish law on withholding tax on dividends
On 7 June 2022, the Swedish Ministry of Finance published a revised proposal regarding a new law on Swedish withholding tax on dividends that will replace the current Swedish Withholding Tax Act. The revised proposal contains several changes to the initial proposal published in April 2020. The new law is proposed to enter into force on 1 July 2023 and apply from 1 January 2024. The consultation period will end on 7 October 2022.
The modernization of the current Swedish withholding tax legislation has been ongoing since 2017 and resulted in an initial proposal for a new withholding tax act presented in April 2020. See Deloitte's article regarding the initial proposal here. The initial proposal was subject to considerable criticism and therefore resubmitted to the Swedish Ministry of Finance for revisal. This article summarizes the main updates in the revised proposal compared to the initial proposal.
Assessment of withholding tax liability
According to both proposals, the person liable to withholding tax is the person who is not subject to unlimited Swedish tax liability and who is entitled to the dividend. The expression "the person entitled to the dividend" in the revised proposal has however been given a different meaning in comparison with the initial proposal. In the initial proposal, the wording was proposed to be in line with the meaning of the term "beneficial owner" in an international context and coincide with the interpretation of the term in the OECD model tax convention. This approach was heavily criticized as it was claimed to be practicably impossible to reach the necessary level of modification that is needed in order to ensure a solid administration of Swedish withholding tax. Therefore, a different meaning of the wording has been presented in the revised proposal.
The wording "the person entitled to the dividend" is now proposed to be consistent with the person who has the civil law entitlement to the dividend (which is usually, but not always, the registered shareholder), even if the right to dispose over received funds may be limited. However, the proposal states that this does not mean that the person who has the legal right to receive the dividend always should be considered the one who is entitled to the dividend. Thus, similar to the current Swedish Withholding Tax Act, the revised proposal suggests an interpretation of the wording “the person entitled to the dividend” in a civil law context opposed to the initial proposal, which suggested an interpretation in an international context.
Furthermore, according to the revised proposal, the assessment of who is entitled to the dividend in security lending agreements should also be determined from a civil law perspective. From a civil law perspective, the legal ownership of the lent shares is considered transferred to the borrower. Accordingly, a borrower in a securities lending agreement should, as a starting point, be considered entitled to the dividend regardless of whether the legal right to the dividend is limited by e.g. a requirement to pay manufactured dividends.
Exemption from tax liability
The current Swedish Withholding Tax Act consists of several exemptions from tax liability. Many of the existing exemptions, together with new exemptions, are proposed to be introduced in the new law on withholding tax on dividends.
Foreign equivalents to Swedish tax-exempt entities
A withholding tax exemption is proposed to apply to, inter alia, foreign equivalents to a Swedish foundation, non-profit association, registered religious community or other legal entities, provided that the received dividend would not have been subject to taxation if the foreign equivalent had been a Swedish entity.
However, contrary to the initial proposal, it is explicitly stated that foreign states and foreign equivalents of a region, municipality or municipal association should not be exempt from withholding tax..
In the initial proposal, the current withholding tax exemption applicable to business-related shares was proposed to be granted only if the person entitled to the dividend is a foreign company resident in the EEA. The initial proposal entailed a reduced possibility to apply the current exemption since such a geographical limitation does not exist in the current legislation. It was claimed that such reduced possibility to apply the exemption could have negative effects on foreign investments in Sweden. Therefore, in the revised proposal, it is suggested to maintain the withholding tax exemption on business-related shares without any geographical restriction.
UCITS funds and special funds
In line with the current Swedish Withholding Tax Act, it is proposed that dividends to foreign UCITS funds and foreign special funds that are resident within the EEA should be tax-exempt. The same is proposed to apply to foreign special funds that are resident in a state outside the EEA with which Sweden has concluded a double tax treaty containing an article on information exchange.
Contrary to the initial proposal, the revised proposal does not include specific definitions of the terms “foreign UCITS fund” and “foreign special fund”. With respect to foreign special funds, it is explicitly stated that the assessment must be made based on the circumstances in each individual case.
Prevention of tax abusive practices
Similar to the initial proposal, it is now proposed to extend the scope of the current Swedish Tax Avoidance Act to include withholding tax on dividends in order to prevent base erosion and tax avoidance. However, the initial proposal included a considerably redrafted Tax Avoidance Act in order to cover a wider range of tax avoidance practices. Furthermore, a special rule on tax liability was proposed to be introduced. According to the initial proposal, the person liable to tax could either be the one who actually received the dividend, or the one who is entitled to the dividend (see above). This was heavily criticized, and the proposal was not considered an effective way to prevent tax abuse due to, inter alia, its incompatibility with double tax treaties concluded by Sweden.
In the revised proposal, only a minor change of the current Swedish Tax Avoidance Act is suggested. In parallel with this proposed amendment, a special rule on tax liability is also introduced, however, with a different meaning compared to the initial proposal. The now proposed special rule on tax liability covers practices which are predominantly aimed at obtaining an undue tax benefit in respect of withholding tax on dividends. An undue tax benefit is defined as a tax benefit resulting from predetermined transactions in which the commercial risks have been contractually removed. The proposed legal consequence of such procedure is equivalent to the consequences in the current Swedish Withholding Tax Act, i.e. the person who is entitled to the dividend (the shareholder as a starting point) is liable to tax even if that person is not on any other basis liable for withholding tax on the dividend. For example, a Swedish company, which as a starting point is not subject to withholding tax, could indeed be subject to withholding tax under the suggested rule.
In the initial proposal, a possibility was presented to allow a company other than the distributing company or fund to assume the responsibility to withhold, declare and pay withholding tax on dividends. It was suggested that a company could act as an approved intermediary only after approval from the Swedish Tax Agency. This entailed a change of the current legislation where institutions holding nominee-registered shares are responsible for withholding tax on dividends. Thus, under the initial proposal, if an institution holding nominee-registered shares would not be an approved intermediary, the responsibility for withholding the tax would be put on the fund management company – a consequence that was criticized.
The possibility for an approved intermediary to assume the responsibility to withhold tax remains in the revised proposal. However, the responsibility for withholding tax on shares that are nominee-registered is proposed to be put on the institution holding nominee-registered shares in the same manner as in the current legislation.
Specific tax return
A significant difference in relation to the current Swedish Withholding Tax Act is the obligation to submit a specific tax return. According to both proposals, the person or entity who is under the obligation to withhold tax on dividends must submit the special tax return for each dividend distribution. The filing obligation is due no later than four months after the date of the dividend distribution according to the revised proposal, in comparison with the two-month filing date which was initially proposed.
A modernized withholding tax act, including certain updates to the initial draft, is welcomed and long-awaited. Although the revised proposal does not differ significantly from the initial proposal in certain parts, the Swedish Ministry of Finance has made several changes and clarifications regarding, inter alia, the withholding tax liability and tax abusive practices. At a first glance, the proposal to identify the tax liability through a civil law interpretation seems to be practicably doable and more predictable. Nevertheless, in practice, we believe that the proposal entails risks for complex application and definition issues, much like the current Withholding Tax Act.
It will be interesting to follow how the revised proposal on withholding tax on dividends will stand in relation to the European Union’s initiative in the same area and whether the proposal, as it is known today, will remain the same after the consultation period ends. We are monitoring this issue.
If you have any questions about withholding tax, do not hesitate to contact our tax experts.