Ruling on refund of dividend WHT to foreign non-UCITS fund
Legal personality of a foreign non-UCITS fund does not prevent fund being considered comparable to a domestic investment fund
On 11 February 2020, the Swedish Supreme Administrative Court ruled on the refund of withholding tax (WHT) imposed during the period 2006–2008 on dividends distributed by Swedish limited liability companies to a US fund with legal personality.
The US fund had requested a refund of the Swedish WHT suffered on dividends it received during the relevant period, claiming that the imposition of the tax was in breach of the free movement of capital principle established in article 63 of the Treaty on the Functioning of the European Union (TFEU), since the fund was treated less favorably than an equivalent Swedish investment fund receiving dividends from Swedish limited liability companies.
The Swedish Tax Agency and the lower administrative courts had denied the refund on the grounds that a foreign non-UCITS (undertaking for collective investment in transferable securities) fund with legal personality is not in a comparable situation to that of a Swedish investment fund, since a Swedish investment fund is established as a contractual arrangement and does not have legal personality.
Dividend distributions from Swedish companies to foreign shareholders generally are subject to a 30 percent WHT, although the rate may be reduced under an applicable tax treaty. Application of the free movement of capital principle under EU law could provide an exemption from WHT (e.g., when a foreign shareholder is considered to be in a situation comparable to that of a Swedish shareholder who is not liable to WHT). As from January 2012, Swedish domestic law contains such an exemption for investment funds.
Decision of the Supreme Administrative Court
The principal question before the Supreme Administrative Court was whether a foreign non-UCITS fund should be considered not to be comparable to a Swedish investment fund solely on the basis that the foreign fund has legal personality. Although requested by the claimant, the court did not request a preliminary ruling from the Court of Justice of the European Union (CJEU) but considered that existing EU case law would provide sufficient guidance.
In its ruling, the Supreme Administrative Court stated that based on EU law, legal personality of a fund may be important when assessing whether a foreign fund is considered to be in a situation comparable to that of a domestic fund, but only where the legal form of the fund is relevant in light of the purpose and structure of the rules. In this regard, the court noted that the criterion for being subject to WHT on dividends is nationality, and this should be the initial consideration of any comparability analysis. However, the court did not rule out that other criteria, such as legal form, also may be of relevance.
The Supreme Administrative Court also addressed the view of the Administrative Court of Appeal that the fund was not comparable to a Swedish investment fund due to a 2016 decision of the Supreme Administrative Court. The question addressed in that case was whether a foreign fund was comparable to a Swedish investment fund when applying the rules on notional income for unit holders of holdings in investment funds according to the Income Tax Act. According to the 2016 decision, a foreign non-UCITS fund with legal personality is not comparable to a Swedish investment fund. In the case at hand, however, the court expressed its view that the 2016 case does not apply to a comparability analysis in relation to the assessment of discrimination when imposing WHT.
The case was referred back to the Administrative Court of Appeal to assess whether the US fund should be considered to be in a situation comparable to that of a Swedish investment fund, disregarding the legal form of the fund, and whether any discrimination may be justified in accordance with the “rule of reason” doctrine established in earlier CJEU judgments that a restriction on the fundamental freedoms is permissible only if it can be justified by overriding reasons in the public interest, if it is appropriate for ensuring the attainment of the objective that it pursues, and does not go beyond what is necessary to attain that objective (i.e., that it is proportional).
In its ruling, the Supreme Administrative Court rejected the view of the Swedish Tax Agency and the lower administrative courts that a foreign non-UCITS fund is not comparable to a Swedish investment fund in relation to the imposition of WHT solely on the basis that the foreign fund has legal personality. The ruling may increase the possibility for foreign non-UCITS funds with legal personality to obtain WHT refunds in future.
However, it is important to note that the ruling only addresses the question of what effect legal personality may have in the context of an analysis of a foreign fund’s comparability to a Swedish investment fund. The ruling does not conclude that legal personality never will be of relevance. There are other conditions that must be met for a foreign fund to be considered comparable to a Swedish investment fund. The Administrative Court of Appeal, to whom the case has been referred back, must make a full comparability analysis.
It also should be noted that the WHT in the ruling relates to the period 2006 2008, under previous tax legislation on the taxation of Swedish investment funds. At that time, Swedish investment funds were subject to corporate income tax on dividends received, but had the right to deduct dividends distributed to the unit holders. The rules for Swedish investment funds were amended in 2012, and such funds no longer are subject to corporate income tax. Instead, tax is imposed at the level of the unit holders. Since the ruling concerns legislation that no longer is in force, it is difficult to assess whether the reasoning and arguments expressed in the ruling can be applied directly in the context of the current tax legislation.
Two members of the Supreme Administrative Court issued a supplementary statement that the 2016 ruling should not affect the application of the current domestic exemption from WHT for foreign funds. Instead, the domestic WHT exemption should be interpreted in the light of EU discrimination case law. This supplementary statement supports the argument that legal personality in itself should not disqualify a foreign fund in a comparability analysis under current rules. Although the supplementary statement is neither precedential nor binding, it could be viewed as providing some direction for the Swedish Tax Agency and the lower courts in their assessments going forward.
It is difficult to draw any decisive conclusions regarding the implications of the ruling, particularly in relation to the current WHT legislation. However, on 26 May 2020, the Administrative Court of Appeal ruled that the relevant US fund indeed was, disregarding its legal form, comparable with a Swedish investment fund since it in a sufficient manner met the remaining requirements which must be fulfilled to be classified as a Swedish investment fund. According to the Administrative Court of Appeal, the discrimination could not be justified in accordance with the “rule of reason” doctrine. Thus, the US fund was granted repayment of the levied withholding tax.
Further, in several cases on repayment of WHT, pending in court, the Swedish Tax Agency has now changed its previous view not to grant repayment with reference to the judgement from the Supreme Administrative Court, and specifically to the supplementary statement issued by the two members of that court relating to the impact of the 2016 ruling in relation to the current legislation. The Swedish Tax Agency has also announced that it within short will issue an updated standpoint regarding the judgement from the Supreme Administrative Court, which hopefully will clarify the overall view of the Swedish Tax Agency in relation to this matter.