The Swedish Supreme Administrative Court and tax treaty application

Stockholm 7 January 2011.

The performance over the last couple of decades of the Supreme Administrative Court of Sweden, SAC, (Högsta Förvaltningsrätten), as far as its application and interpretation of Sweden's tax treaties are concerned, has been quite disappointing. At a recent international tax seminar at the Stockholm University discussing the 2008 treaty override case, see below, (and the possible demand for new legislation) professor Gustaf Lindencrona, Sweden's leading authority on international taxation, suggested that the Court seemingly had lost ”the international dimension” of taxation. Several decisions by the Court have also been quite costly to the Swedish treasury requiring repeated and precipitate ”rescue operations” by the legislator and treaty negotiator to stem the tide of run-away Swedish tax bases.

Here a brief résumé:

In 1987 in the wake of a stockmarket boom the Court became the darling of Swedish international tax planners when it gave the subject-to-remittance article, (a specific anti tax avoidance regulation of the Sweden - UK treaty), a very narrow interpretation, allowing for a double tax exemption of non-remitted gains on Swedish shares benefiting a substantial number of Swedish shareholders taking up residence in the UK. A corresponding incident, which also concerned share gains, ocurred in 2004 regarding the subject-to-tax clause of the Sweden-Peru treaty. This article, too, is a typical anti tax avoidance rule to prevent double non taxation. Focussing in their interpretation of these articles on what was the mutual intention of the contracting states the Court concluded that the negotiating parties indeed had intentionally decided that share gains should be excluded from the anti tax avoidance rules of the treaties in question. Both treaties were subsequently terminated by Sweden (the Peruvian treaty permanently).

In the 1990-ies when taking a look at the residence article of the treaty with Kenya the Court arrived at a solution whereby an individual who qualified as a resident of Kenya under the treaty automatically became a non-resident for tax purposes also under Swedish tax law! The Swedish Parliament immediately imposed a new Swedish law on the application of tax treaties crippling the decision and the Court itself blushingly reversed its opinion in an in-plenum decision.

In 2001, and in violation of the wording of the Sweden-US treaty, the Court denied a Swedish resident partner a credit for the US (transparent) partnership tax on the income allocable to the Swedish partner. The axing of this decision by Jesper Barenfeld in his subsequent doctoral dissertation ”Taxation of Cross-Border Partnerships” was very thorough. Afterwards, and with several big companies contemplating moving partnership investments abroad, the legislator mended the fence by changing the Swedish domestic credit of foreign tax regime.

And then in 2008 the Court ordained a blatant treaty override with regard to our new 2004 CFC-legislation! Disqualifying a very conscientious interpretation by the Swedish Advance Rulings board of the Swedish tax treaty with Switzerland where the the Swedish controlling company had set up a low-taxed subsidiary, the Court came to the conclusion that the treaty did not trump the new Swedish legislation. They even went so far as decreeing that it was not necessary to analyse the treaty! Instead a very ambiguous declaration was introduced under which the Swedish domestic law was given precedence on the grounds that it constituted ”lex posterior” and ”lex specialis”. The Swedish international tax community has been in uproar against the ruling generating something like fifteen angry articles.

But now (in a decision on 15 December 2010), to everybody's relief,(in a case concerning share gains derived upon emigration by the shareholder from Sweden) the Court has retracted, re-establishing the longstanding principle (laid down in the all the laws incorporating our tax treaties) that such a treaty if it limits Swedish taxing rights under domestic law, whenever introduced and whatever its content, must always be respected.

(The tax planning that goes into this arrangement is to transfer a (profitable) Swedish company to a wholly-owned holdingcompany in the EU (which under Swedish domestic participation exemption rules can take place tax free). Thereupon the Swedish shareholder takes up residence in a treaty country (with a low or non-existent capital gains taxation regime) where the treaty confers sole taxing rights on this country whereupon the shares of the EU parent holdingcompany are sold. Consequently, the migrating shareholder was exempted from capital gains taxation in Sweden under the treaty. The Court, however, also decreed that the case be returned to the Advance Rulings board to determine whether or not the arrangement should be caught by the general Swedish anti-avoidance rule.)

The ruling was not, which was expected, decided by the full Court (in plenum) and therefore the 2008 ruling as far as our CFC legislation is concerned still stands. Or, in other words, our domestic CFC rules still override our treaties. The blemish of the tax treaty override thus still remains to a certain extent.

(Somewhat mysteriously one of the judges (Peter Kindlund) took part in both decisions.)

peter@sundgren.net