The company in question is an alternative investment fund and its operations involved managing the fund’s capital. The Supreme Administrative Court found that the fund company constituted an actual establishment from which a commercially motivated operation was conducted. Exemption from CFC taxation is thus appropriate.
Individuals who reside in Sweden and hold shares in Swedish or foreign companies are, as a main rule, subject to tax on dividends and capital gains on such shares. The amount of the dividends and capital gains which are taxed depends on the type of shares involved. Where certain conditions are met, only 5/6ths of the dividends and capital gains on shares in unlisted Swedish companies need to be reported. The same applies to shares in unlisted foreign companies provided that the income tax charged to the company is comparable to the income tax charged to a Swedish company. In the event the requirement of comparable taxation is not met, the dividends and capital gains are taxed in their entirety. The question then arises whether it violates the provisions of the TFEU regarding free movement to maintain in this case the requirement of the Income Tax Act of comparable taxation.
As to whether only 5/6ths of the dividends and capital gains on shares in the company was to be taxed, the Court stated that the requirement of comparable taxation has as a consequence the fact that dividends and capital gains on shares in the fund company are taxed more heavily than those in a Swedish unlisted company. Accordingly, there is a detrimental difference in treatment which, in principle, violates both the freedom of establishment and the free movement of capital. However, it follows from established case law from the European Court of Justice that a detrimental difference in treatment does not violate the Treaty where the cross-border situation is not objectively comparable to an internal situation.
The Court stated that the purpose of the provisions regarding 5/6ths taxation is to mitigate double taxation of company income. In the case in question, since no part of the fund company’s profit was taxed in Luxembourg, there was no risk of double taxation. Accordingly, the shareholders could not be deemed to be in a situation which was objectively comparable to the situation of a shareholder in a Swedish company. For these reasons, the Court found that it did not violate the Treaty on the Functioning of the European Union to apply in the current case the requirement of comparable taxation and thereby exclude dividends and capital gains on shares in the fund company from the area of application of the rules regarding 5/6ths taxation.
Read the judgment here:
On Controlled Foreign Company (“CFC”) taxation in Sweden
In certain cases, income derived in foreign, low-taxed companies is taxed on an ongoing basis to the company’s shareholders in Sweden, i.e. the shareholders are taxed before the income is distributed. This is known as CFC taxation. The purpose of this regulation is to prevent or render more difficult tax planning by means of such companies. If the foreign company constitutes an actual establishment from which a commercially motivated operation is conducted, however, CFC taxation shall not be imposed even if other conditions therefore are met. In such cases, the owner is taxed in the usual order on dividends and capital gains on the shares.