WebJournal on International Taxation in Sweden (WITS) no 3/2012 (March)
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Overseas property tax cheats who appear to be living beyond their means are the target of a team of 200 Her Majesty's Revenue & Customs (HMRC) investigators. HMRC is warning wealthy investors with land and property abroad that they are combing their tax returns to make sure they have declared income and proceeds of sale.
A task force of accountants, investigators and finance professionals is collecting information from government agencies, the internet and foreign tax authorities and have harnessed sophisticated risk assessment techniques to pinpoint high net worth individuals not paying enough income tax and capital gains tax. Data-mining is the main weapon against tax evaders with internet spiders - computer programs that crawl the web looking for information in the same way search engines scan web sites. The spiders can sift vast amounts of information - like tracing a property owner from foreign tax authority data to match with information about property to let on holiday web sites.
A similar hunt for landlords and property owners cheating tax is concentrating on the Land Registry,housing benefit payments, the electoral roll and tax returns.Forex and commodity traders are also under investigation by the tax man.
Exchequer Secretary to the Treasury, David Gauke, said: “The government is committed to tackling tax evasion and avoidance across all areas of the economy. That is why we allocated £917m to HMRC to reduce the tax gap over the next four years. The new team is part of that investment. With HMRC’s increased capability and expertise, and its increasing success in tackling evasion both at home and offshore, the message is clear: there is no hiding place for tax cheats.”
Stockholm 12 March 2012
peter@sundgren.net
tisdag 13 mars 2012
Refund of withholding tax on dividends paid to foreign investment funds within the EU.
WebJournal on International Taxation in Sweden (WITS) no 3/2012 March
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On 15 February the Tax Appeals Court (kammarrätten) in Sundsvall delivered 16 judgments ordering a refund of Swedish dividend withholding tax (kupongskatt) to foreign investment funds situated in the Community.
Swedish investment funds may deduct distributions made to their investors which of course is an incentive to make such distributions reducing the corporate tax base of the fund. Dividends paid to foreign investment funds, however, do not enjoy the same deduction and are also liable to Swedish dividend withholding tax at 30 percent or applicable treaty rate, in most cases 15%. Such funds are thus treated in a less favourable way than Swedish investment funds under the same conditions. The Court has thus ruled that the Swedish tax rules are unjustifiably in breach of the EU principles of free movement of capital and consequently that the taxes paid should be refunded.
Somewhat surprising is that the Court has not applied for an advance ruling by the European court of Justice.
Still pending are applications for refund of Swedish dividend taxes paid by investment funds outside the EU/EES and foreign pension funds.
It is expected that the ruling by the Sundsvall court will be appealed to the Supreme Administrative Court of justice. If it is upheld and considering that foreign investment- and pension funds are extremely big investors on the Swedish stock exchange and that dividend distributions from Swedish corporations have been very large in the last couple of years, the combined tax refunds comprising the five past years will be quite enormous. We are talking of billions of Swedish crowns.
Stockholm 12 March 2012
peter@sundgren.net
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On 15 February the Tax Appeals Court (kammarrätten) in Sundsvall delivered 16 judgments ordering a refund of Swedish dividend withholding tax (kupongskatt) to foreign investment funds situated in the Community.
Swedish investment funds may deduct distributions made to their investors which of course is an incentive to make such distributions reducing the corporate tax base of the fund. Dividends paid to foreign investment funds, however, do not enjoy the same deduction and are also liable to Swedish dividend withholding tax at 30 percent or applicable treaty rate, in most cases 15%. Such funds are thus treated in a less favourable way than Swedish investment funds under the same conditions. The Court has thus ruled that the Swedish tax rules are unjustifiably in breach of the EU principles of free movement of capital and consequently that the taxes paid should be refunded.
Somewhat surprising is that the Court has not applied for an advance ruling by the European court of Justice.
Still pending are applications for refund of Swedish dividend taxes paid by investment funds outside the EU/EES and foreign pension funds.
It is expected that the ruling by the Sundsvall court will be appealed to the Supreme Administrative Court of justice. If it is upheld and considering that foreign investment- and pension funds are extremely big investors on the Swedish stock exchange and that dividend distributions from Swedish corporations have been very large in the last couple of years, the combined tax refunds comprising the five past years will be quite enormous. We are talking of billions of Swedish crowns.
Stockholm 12 March 2012
peter@sundgren.net
Interpretation and application of tax treaties – graduation thesis (examensarbete 30 högskolepoäng))
WebJournal on International Taxation in Sweden (WITS) no 3/2012 (March)
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Over a period of professional life of about thirty years I have devoted a lot of attention to the study and analysis of international taxation in general and of double taxation treaties in particular. In terms of numbers of articles, reports and papers written on these subjects I would suggest that I am second to none in Sweden.
There is of course still a lot to be concerned about regarding our Swedish tax treaties. This was indeed highlighted recently when the Swedish National Audit Office (Riksrevisionen) and the Federation of Sweish Enterprise (Svenskt Näringsliv) – simultaneously actually – critisized the legislator and tax treaty negotiator for having neglected our treaty network for such a long time. Another reason for concern is the deploring track record of our Supreme Administrative (Tax) Court regarding treaty interpretation and treaty application matters. See my report hereon from 7 January 2011 at www.petersundgren.blogspot.com. This became especially apparent in the passionate debate that has taken place over the last couple of years regarding the treaty override cases RÅ 2008 ref. 24 (the OMX case) and RÅ 2010 ref. 112 (the Greece case) which have seriously tarnished the Court's reputation regarding treaty application matters. Professor Gustaf Lindencrona, Sweden's leading authority on international taxation, despairingly noted that the Court had ”lost its international dimension” and all one could do was to set one's hopes to the next generation of Supreme Court justices.
Therefore it is very satisfactory to learn that the interest in tax treaty matters is kept alive in that generation, more specifically at the university in Lund where Edina Catic (in June 2011) graduated with a remarkable thesis on ”Interpretation and Application of Tax Treaties in the Light of Recent Court Case Developments” (Tolkning och tillämpning av dubbelbeskattningsavtal i ljuset av den senaste tidens rättsutveckling). It is a very comprehensive paper covering no less 118 pages and can be accessed at ( http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=1977031&fileOId=1977133). The allusion to ”recent court case developments” is of course a reference to the treaty override debacle. In a restrained understatement she concludes that the Court's views on treaty override may yet give rise to future problems.
With regard to treaty interpretation in Sweden we are in the very fortunate position that the Court on two occasions, RÅ 1987 ref. 162, ”the subject-to-remittance-case” regarding the UK treaty and RÅ 1994 ref. 84, ”the Luxembourg case, have specifically addressed this matter and firmly established that interpretation shall be conducted in accordance with the international law principles on this matter laid down in the Vienna Convention on the Law of Treaties where all measures - with a strong purposive (teleolocical) approach - should be adopted in order to reveal the intentions of the Contracting States. The 1987 subject-to-remittance case, focussing on article 3.2. of the OECD Model treaty regarding the inerpretation of terms not specifically interpreted in the treaty, constitutes nothing less than an interpretation of this interpretation article! The prevailing methods for interpretation of domestic Swedish laws, disfavouring teleological overtures, and giving the terms of a treaty the meaning they may have under domestic tax laws should be demoted to a very last resort method. Ms Catic points this out very clearly.
It should, however, be underlined that the Court's recent treaty override decisions have in no way changed this attitude to treaty interpretation. For the simple reason that treaty override has nothing to do with treaty interpretation. Treaty override is a matter of treaty application addressing the problem of which text that should prevail in determining tax liability, the treaty or domestic (Swedish) tax law, whereas, on the other hand, treaty interpretation is an intellectual process to determine the meaning of the relevant treaty provision. This distinction between treaty application and treaty interpretation by certain commentators, especially Professor Mattias Dahlberg in his 2008 article in Skattenytt pages 482-489, has been misunderstood. In the pertinent OMX treaty override case the Court makes it quite plain that the Swedish domestic (CFC) rule prevails. Period. And that there is no need of any analysis whatsoever of the treaty. So how can one talk of interpretation of a treaty which has not be analysed?1 Consequently, I repeat, treaty override is a matter dealing with treaty application not treaty interpretation.
Maybe therefore Ms Catic should have restricted the title of her thesis to ”Tax Treaty Application in the light of recent Court Case Developments”. But her paper on the other hand discloses that she has a very good grip on treaty interpretation matters (too).
As mentioned above, I have produced a lot of work on treaty application and treaty interpretation. In the recent past especially on treaty override. Here follows a non-exhaustive list of articles which in one way or the other relate to by Ms Catic's work:
Title
Om tolkning av dubbelbeskattningsavtal IUR*)- Meddelande 10-11/1988
Skatterättslig bosättning/hemvist (rättsfall) IUR-Meddelande 2/1996
(Kenya 1 och 2)
Labuan/Treaty override IUR-INFO 3/2002
Labuan Island/treaty override/one more time WITS**) 2/2004 (skatter.se)
Taxation of Cross-Border Partnerships WITS 1/2005 (skatter.se)
Interpretation of Tax Treaties authenticated in two or more languages – a case study. Svensk Skattetidning 5/2006
Treaty override WITS 4/2008 (skatter.se)
Försäljning av aktier efter utflyttning Del 1 WITS 5/2009 (skatter.se)
(Thailandsmålet)
Legalitetsprincipen och skatteavtal WITS 4/2009 (skatter.se)
Normhierarki och regelkonkurrens WITS 3/2010 (skatter.se)
Regeringsrätten backar i treatyoverridefrågan – delvis
WITS 1/2011 (petersundgren.blogspot.com)
Vidare angående intern skatterätt och skatteavtal.
(Kommentarer till Ann-Sophie Sallanders artikel
i Svensk Skattetidning 2010 (sid 177-204) ”I kölvattnet
av RÅ 2008 ref.24”). WITS 2/2011(petersundgren.blogspot.com)
Mail till Mathias Dahlberg ang. treaty override, WITS 3 /2011(petersundgren.blogspot.com)
A scientific study of the taxation of 'emigrating'
capital gains. (Utflyttningsbeskattning av kapitalökningar) WITS 4/2011 (petersundgren.blogspot.com)
*) IUR = Institutet för Utländsk Rätt
**) WITS = WebJournal on International Taxation in Sweden.
These articles ”have been comprehensively discussed” but have not qualified for reference purposes in Ms Catic's thesis, declares Professor of Fiscal Law at the Lund University and Ms Catic's tutor (handledare) Mats Tjernberg.
Stockholm 12 March 2012.
peter@sundgren.net
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Over a period of professional life of about thirty years I have devoted a lot of attention to the study and analysis of international taxation in general and of double taxation treaties in particular. In terms of numbers of articles, reports and papers written on these subjects I would suggest that I am second to none in Sweden.
There is of course still a lot to be concerned about regarding our Swedish tax treaties. This was indeed highlighted recently when the Swedish National Audit Office (Riksrevisionen) and the Federation of Sweish Enterprise (Svenskt Näringsliv) – simultaneously actually – critisized the legislator and tax treaty negotiator for having neglected our treaty network for such a long time. Another reason for concern is the deploring track record of our Supreme Administrative (Tax) Court regarding treaty interpretation and treaty application matters. See my report hereon from 7 January 2011 at www.petersundgren.blogspot.com. This became especially apparent in the passionate debate that has taken place over the last couple of years regarding the treaty override cases RÅ 2008 ref. 24 (the OMX case) and RÅ 2010 ref. 112 (the Greece case) which have seriously tarnished the Court's reputation regarding treaty application matters. Professor Gustaf Lindencrona, Sweden's leading authority on international taxation, despairingly noted that the Court had ”lost its international dimension” and all one could do was to set one's hopes to the next generation of Supreme Court justices.
Therefore it is very satisfactory to learn that the interest in tax treaty matters is kept alive in that generation, more specifically at the university in Lund where Edina Catic (in June 2011) graduated with a remarkable thesis on ”Interpretation and Application of Tax Treaties in the Light of Recent Court Case Developments” (Tolkning och tillämpning av dubbelbeskattningsavtal i ljuset av den senaste tidens rättsutveckling). It is a very comprehensive paper covering no less 118 pages and can be accessed at ( http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=1977031&fileOId=1977133). The allusion to ”recent court case developments” is of course a reference to the treaty override debacle. In a restrained understatement she concludes that the Court's views on treaty override may yet give rise to future problems.
With regard to treaty interpretation in Sweden we are in the very fortunate position that the Court on two occasions, RÅ 1987 ref. 162, ”the subject-to-remittance-case” regarding the UK treaty and RÅ 1994 ref. 84, ”the Luxembourg case, have specifically addressed this matter and firmly established that interpretation shall be conducted in accordance with the international law principles on this matter laid down in the Vienna Convention on the Law of Treaties where all measures - with a strong purposive (teleolocical) approach - should be adopted in order to reveal the intentions of the Contracting States. The 1987 subject-to-remittance case, focussing on article 3.2. of the OECD Model treaty regarding the inerpretation of terms not specifically interpreted in the treaty, constitutes nothing less than an interpretation of this interpretation article! The prevailing methods for interpretation of domestic Swedish laws, disfavouring teleological overtures, and giving the terms of a treaty the meaning they may have under domestic tax laws should be demoted to a very last resort method. Ms Catic points this out very clearly.
It should, however, be underlined that the Court's recent treaty override decisions have in no way changed this attitude to treaty interpretation. For the simple reason that treaty override has nothing to do with treaty interpretation. Treaty override is a matter of treaty application addressing the problem of which text that should prevail in determining tax liability, the treaty or domestic (Swedish) tax law, whereas, on the other hand, treaty interpretation is an intellectual process to determine the meaning of the relevant treaty provision. This distinction between treaty application and treaty interpretation by certain commentators, especially Professor Mattias Dahlberg in his 2008 article in Skattenytt pages 482-489, has been misunderstood. In the pertinent OMX treaty override case the Court makes it quite plain that the Swedish domestic (CFC) rule prevails. Period. And that there is no need of any analysis whatsoever of the treaty. So how can one talk of interpretation of a treaty which has not be analysed?1 Consequently, I repeat, treaty override is a matter dealing with treaty application not treaty interpretation.
Maybe therefore Ms Catic should have restricted the title of her thesis to ”Tax Treaty Application in the light of recent Court Case Developments”. But her paper on the other hand discloses that she has a very good grip on treaty interpretation matters (too).
As mentioned above, I have produced a lot of work on treaty application and treaty interpretation. In the recent past especially on treaty override. Here follows a non-exhaustive list of articles which in one way or the other relate to by Ms Catic's work:
Title
Om tolkning av dubbelbeskattningsavtal IUR*)- Meddelande 10-11/1988
Skatterättslig bosättning/hemvist (rättsfall) IUR-Meddelande 2/1996
(Kenya 1 och 2)
Labuan/Treaty override IUR-INFO 3/2002
Labuan Island/treaty override/one more time WITS**) 2/2004 (skatter.se)
Taxation of Cross-Border Partnerships WITS 1/2005 (skatter.se)
Interpretation of Tax Treaties authenticated in two or more languages – a case study. Svensk Skattetidning 5/2006
Treaty override WITS 4/2008 (skatter.se)
Försäljning av aktier efter utflyttning Del 1 WITS 5/2009 (skatter.se)
(Thailandsmålet)
Legalitetsprincipen och skatteavtal WITS 4/2009 (skatter.se)
Normhierarki och regelkonkurrens WITS 3/2010 (skatter.se)
Regeringsrätten backar i treatyoverridefrågan – delvis
WITS 1/2011 (petersundgren.blogspot.com)
Vidare angående intern skatterätt och skatteavtal.
(Kommentarer till Ann-Sophie Sallanders artikel
i Svensk Skattetidning 2010 (sid 177-204) ”I kölvattnet
av RÅ 2008 ref.24”). WITS 2/2011(petersundgren.blogspot.com)
Mail till Mathias Dahlberg ang. treaty override, WITS 3 /2011(petersundgren.blogspot.com)
A scientific study of the taxation of 'emigrating'
capital gains. (Utflyttningsbeskattning av kapitalökningar) WITS 4/2011 (petersundgren.blogspot.com)
*) IUR = Institutet för Utländsk Rätt
**) WITS = WebJournal on International Taxation in Sweden.
These articles ”have been comprehensively discussed” but have not qualified for reference purposes in Ms Catic's thesis, declares Professor of Fiscal Law at the Lund University and Ms Catic's tutor (handledare) Mats Tjernberg.
Stockholm 12 March 2012.
peter@sundgren.net
måndag 5 mars 2012
Ingvar Kamprad's Liechtenstein foundation to pay tax in Sweden (and 39 other countries)?
WebJournal on International Taxation in Sweden (WITS) no 2/2012
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By Peter Sundgren
In 1991 at the world congress of the International Fiscal Association (IFA) in Barcelona I chaired a panel discussion group on the topic of tax treaty shopping. And inspired hereby I wrote an article on this matter in 1992 for the Law Review of the Institute of Foreign Law in Stockholm. IUR-meddelande 6/1992.
A key provision in articles 10 – 12 regarding dividends, interest and royalties of all tax treaties based on the OECD's Model Tax Convention is the beneficial ownership rule discharging the source state's obligation to provide treaty benefits on payments to recipients in the residence state. In the wake of the The Conduit Companies Report adopted by the OECD Council in 1986, the problems involved in these situations gave rise to an intense discussion in Barcelona. But it is of course a topic which since then has given rise to much consideration. Most importantly the OECD's Fiscal Committee is presently reviewing the matter and has recently (29 April 2011) issued a discusion draft under the title ”Clarification of the Meaning of ”Beneficial Owner” in the OECD Model Convention ”. The final report and the new commentaries are expected to be introduced in the 2014 version of the OECD Model.
As it appears Mr Ingvar Kamprad, the legendary (and charmingly self-belittling) founder of the worldwide IKEA empire (and ranking number 5 on Fortunes list of the world's billionaires), may have paid little attention to my article on treaty shopping and the problems involving the beneficial ownership test when he set up what is now considered his notorious Interogo Foundation in Liechtenstein.
This foundation, (like all other Liechtenstein foundations), has been shrouded in complete secrecy.1) Until, that is, just about a year ago when a probe conducted by a team of investigative journalists from the Swedish news organisation SVT (Sveriges Television) and Smålandsposten 2) revealed that Mr Kamprad and his family controlled Interogo and owned the IKEA trademark which is licensed to IKEA stores around the world. For the use of this trademark every store pays a 3 percent (tax deductible) royalty on their turnover to Inter Ikea Holding B.V., an indirectly, (through Inter Ikea S.A in Luxembourg), wholly owned Dutch company. By means of what appears to be a back-to-back royalty agreement between Inter Ikea Holding and Interogo – but there could be additional agreements and companies interposed in this stratagem – 70 percent of the royalties are subsequently passed on to Interogo.
Mr Kamprad, who is wellknown for his international tax planning strategies, has issued a spirited defence of his business structure, which he said was designed to preserve IKEA's long-term independence and financial strength. Referring to IKEA's use of financial havens such as Liechtenstein, the 85 year old Swede argued that ”tax efficiency” is a natural part of the company's low-cost culture. ”We have always viewed taxes as a cost, equal to any other cost of doing business”, he said in a statement, while insisting ”that IKEA paid taxes in every country in which it operates and complied fully with all laws and regulations”. (According to one report in 2005, out of earnings of several hundred million dollars, IKEA paid a total of 3.5% in tax.) 3)
In a recent statement to Dagens Industri, Mr Hans Gydell, the CEO of Inter Ikea Holding, has said that the ownership of the IKEA trademark has been placed for all eternity in the tax paradise Liechtenstein, ”and even if Mr Kamprad would so wish it would be impossible to break this up and transfer ownership elsewhere. It was precisely for the purpose of protecting the IKEA concept and trademark for the future that this very special and stable ownership arrangement was chosen and I have never heard him regret this decision.” According to a recent article in Smålandsposten (25 February 2012) which is based on an interview with Mr Kamprad, who is usually quite reluctant to give interviews, explains that there is a quite flexible kind of foundation in Liechtenstein allowing its statutes to be changed with short notice. For example, Interogo had recently changed its rules regarding the nomination of its board members. Until the end of 2010 changes of board member ship was determined by a trust in Canada (Appo Trust in Ontario) 4) which is presently being dismantled. All that has been known about this trust was that it was controlled by the Kamprad family. Smålandsposten and SVT have unsuccessivly tried to get official information hereabout but it appears that Appo Trust is of a kind that does not require registration in Canada. Today the appointment of board membership in Interogo is carried out by a special administrative council (Stiftungsrat) consisting of Ingvar Kamprad, Mathias Kamprad, Alfred Wiederkehr member of the boards of the Ingka and Ikea Foundations, Per Ludvidsson chairman of the board of the Ikea Group, Hans Gydell, board member of the Ikea Group, Johannes Stenberg personal assistent to Ingvar Kamprad, and Urs Wickihalder, Partner Bratchi, Wiedermeir & Buob (Zurich) and member of the Council of the Association of Swiss Grantmaking Foundations. Upon resignation from the board Ingvar Kamprad shall appoint his successor. This structure will remain also upon Invar Kamprad leaving the organisation. The information is somewhat nebulous as the statutes also provide that the Kamprad family is entitled to three members of the council and that four shall be non Kamprad family members. Upon the resignation of Ingvar Kamprad every council member including those of the Kamprad family shall appoint his successor but the Kamprad family can veto such decisions. The board of Interogo which is supervised by the administrative council consists of Herbert Oberhuber and Johannes Burger, partners of Marxer & Partner lawfirm in Liechtenstein. They appoint the board members of Inter Ikea Holding annually. The chairman of the board of this company is the wellknown Swedish Tax Law Professor Göran Grosskopf. In addition the company also has a Supervisory Board chaired by Mr Kamprad. Some of the statutes of Interogo remain secret. Paragraph 12 is quite clear on this point: ”These statutes including specific changes thereof and all other factual and legal circumstances affecting the Foundation may not be disclosed to outsiders, in particular not to foreign administrative bodies.”
Together with the legal ownership of the IKEA trademark and the hundred percent share holding in Inter Ikea Holding B.V. as reported above, it appears that Mr Kamprad and his family have total control of the financial affairs of the Interogo Group 5)
For tax purposes, the benefits of this arrangement is that the Netherlands has tax treaties with (probably) most of the countries where the IKEA stores are situated, treaties which reduce royalty taxes in most cases to nil percent in the source state instead of the quite considerable taxes which usually are imposed hereon under domestic rules of these countries. Also, which indicates that the choice of Netherlands for the establishment of Inter Ikea Holding is not haphazard, this country under its domestic tax regime does not impose any source tax on roylties paid to either Liechtenstein or any other countries. Thus, the money, apart from an arm's lenght profit margin being taxed in the Netherlands, winds up completely tax free in the hands of the Interogo foundation. And there is of course no tax in Liechtenstein.
If on the other hand the royalties had been paid directly from the IKEA stores to Liechtenstein there would allways be full domestic source taxes on the royalties because there is no country that has a tax treaty with Liechtenstein. (In Sweden source taxes on outgoing royalties are imposed in this case at the corporate tax rate of 26.3%.) To use the usual tax lingo Interogo has thus ”shopped” the Netherlands' treaties concluded with the IKEA store countries. Or, in other words, Interogo has used the Netherlands and Inter Ikea Holding as a ”shopping bag” for tax purposes for collecting its world wide royalties.
However, which has already been mentioned above, there is an important condition in the royalty clause of most tax treaties prescribing that the source state is obliged to waive its source tax only if the recipient in the residence state (the Netherlands) is the beneficial owner of the (royalty) income. In French ”bénéficiaire effectif”, in German ”Nutzungsberechtiger”. In Sweden´s tax treaties the obligation to reduce the source tax requires that the recipient ”har rätt till royaltyn”. If therefore, when interpreting this term one would conclude that the Interogo Foundation in Liechtenstein and not Inter Ikea Holding in the Netherlands should be considered the beneficial owner of the royalties the benefits under the article are to be denied and the source state can go ahead and collect from Inter Ikea Holding (not Interogo as suggested in the title of this article) its regular domestic source taxes on royalties.
At the introduction of the concept of beneficial owner in the 1977 Commentaries to the Model Convention the only clarification of this term that was given was that intermediaries such as an agent or nominee did not qualify as beneficial owners and were thus excluded from treaty benefits on receipts of royalties, (dividends and interest).
Ten years later in the Conduit Company report it was further emphasized that beneficial ownership should also be read in the context of its purpose, namely in the effort of the OECD to deal with tax avoidance. The Committee on Fiscal Affairs had expressed its concern about the improper use of tax conventions by persons acting through a legal entity with the main or sole purpose of obtaining treaty benefits which would not be available directly to such a person. In the words of the Report, it ”deals with the most important situation of this kind, where a company situated in a treaty country is acting as a conduit for channeling income economically accruing to a person in another State who is thereby able to take advantage 'improperly' of the benefits provided by a tax treaty. This situation is often referred to as 'treaty shopping'. The 'conduit company' which is characteristic of such schemes is usually a corporation but may also be a partnership, trust or similar entity.”
The key word in this statement is that the income channeled through the conduit company economically accrues to a person in another State rather than to the conduit company. Usually, according to the Report, (but which, as explained above, is not the case in the Interogo/Inter Ikea Holding scheme), the assets and rights that give rise to the (dividends, interest, or) royalties have been transferred to the conduit company enabling it to obtain the treaty benefits.
In the new 2011 OECD discussion draft emphasis is further placed on the ability of the recipient to have ”the full right to use and enjoy the income received unconstrained by any contractual or legal obligation to pass the the payment received to another person.” Moreover, and quite importantly, under section 4.4. of the draft, the OECD points out that the fact that the recipient of royalties is considered to be the beneficial owner of the royalties does not preclude the possibility to deny the benefits of the treaty in cases of abuse of the provisions described in the Commentaries to paragraph 1 of the Model Treaty. These include specific treaty anti-abuse provisions, generel anti-abuse rules and substance-over-form or economic substance approaches.
As can be gleaned from the above analysis about the meaning of beneficial ownership the determination hereof is quite a complicated and multifaceted affair and, which is important to mention, can be established only upon a thorough investigation of the facts and circumstances of each and every case. It is therefore not possible to give a final answer hereto with regard to the Interogo/Inter Ikea Holding arrangement. It is therefore justified that the statement made in the title of this paper is followed by a questionmark.
The head of the legal department of The Swedish Tax Administration Mr Tomas Algotsson has declared (Dagens Industri 27 January 2011) that he cannot say if a tax inquiry will be initiated against IKEA. He points out that he can only handle the Swedish legislation in this regard but not the tax consequences of the foreign operations of the company. Regarding the 3 percent royalty payments he finds that this must be determined by the rules of the treatment of intercompany payments. This arm's length problem is, however, a completely different issue specifically dealt with in paragraph 4 of article 12 in the Sweden-The Netherlands tax treaty. Mr Algotsson's statement thus indicates that no attention seems to have been paid by the Tax Administration to the beneficial ownership question laid down in paragraph 1 of article 12. Probably because of the secrecy that has surrounded Interogo and that its business structure has thus not been understood.
As implied above a determination of the beneficial ownership concept is a very difficult one and, as far as is known, it has never been tested by any tax court in Sweden. There are several reasons, however, why a probe into these matters would be interesting in the Interogo/Inter Ikea Holding setup. Firstly, and most importantly, the information that has surfaced about Interogo and the royalty payments in the last couple of months, albeit somewhat conflicting, is of such a scope and nature that a test of the beneficial ownership concept in this case is indeed warranted and could also in the process shed light on this elusive tax treaty problem in general. Secondly, an investigation of this kind could prove to be of enormous fiscal interest not only to Sweden but to all countries that have IKEA stores. Mr Kamprad has confirmed that Interogo has amassed a fortune of about 12 billion US dollars, (corresponding to about 100 billion (miljarder) Swedish crowns) in Liechtenstein. IKEA's homepage reports that there are 334 stores – and counting – in 40 different countries. The number of stores in Sweden is about 17. According to Wikipedia the combined turnover in 2007 of IKEA was 212 billion SEK. 3 percent thereof amounts to 6.36 billion SEK. The loss of tax revenue by the Swedish treasury alone from the royalty scheme is estimated at 100 million SEK annually (Dagens Industi 26 January 2011). Thirdly, it should be mentioned that Sweden has recently negotiated an agreement with Liechtenstein for exchange of information for tax purposes and that therefore it should now be possible for the Swedish tax authorities to obtain full information about Interogo.
The development of an investigation of this kind would no doubt be closely followed by the tax authorities in the 39 other countries that have tax treaties with The Netherlands with a beneficial ownership clause.
Stockholm 5 March 2012
peter@sundgren.net
Footnotes:
1.A Swedish translation of the statutes of Interogo are available at http://svt.se/content/1/c8/02/30/43/75/Stadgar_Interogo_Svenska.pdf. Noteworthy is the fact that there are no references therein to Mr Kamprad or IKEA whatsoever.
2. Bosse Vikingsson and Kenneth Gehrman, reporters at Smålandsposten, have been nominated to the journalistic award The Golden Spade for their unearthing of the Interogo scheme.
3The “Berne Declaration”, a non-profit non governmental Swiss organization that promotes corporate responsibility, has formally criticized IKEA for its tax avoidance strategies. In 2007, the Berne Declaration nominated IKEA for one of its Public Eye "awards", which highlight corporate irresponsibility and are announced during theWorld Economic Forum in Davos, Switzerland.
4. See paragraph 7 of the statutes of Interogo.
5. It should, however, be mentioned that this sharply contrasts with the information provided on IKEAs homepage which declares that the world wide IKEA concept is owned by Ikea Systems B.V. in The Netherlands and that the IKEA group and all franchisees make payments to the said company for the right to use the IKEA System and its continuing development and improvement. Also pointed out, and quite surprisingly, is that the relationship between Inter Ikea Systems B.V. and its franchisees is based on a business agreement between independent parties, (which for tax purposes would suggest that the royalty payments are not subject to arm's length tax considerations).
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By Peter Sundgren
In 1991 at the world congress of the International Fiscal Association (IFA) in Barcelona I chaired a panel discussion group on the topic of tax treaty shopping. And inspired hereby I wrote an article on this matter in 1992 for the Law Review of the Institute of Foreign Law in Stockholm. IUR-meddelande 6/1992.
A key provision in articles 10 – 12 regarding dividends, interest and royalties of all tax treaties based on the OECD's Model Tax Convention is the beneficial ownership rule discharging the source state's obligation to provide treaty benefits on payments to recipients in the residence state. In the wake of the The Conduit Companies Report adopted by the OECD Council in 1986, the problems involved in these situations gave rise to an intense discussion in Barcelona. But it is of course a topic which since then has given rise to much consideration. Most importantly the OECD's Fiscal Committee is presently reviewing the matter and has recently (29 April 2011) issued a discusion draft under the title ”Clarification of the Meaning of ”Beneficial Owner” in the OECD Model Convention ”. The final report and the new commentaries are expected to be introduced in the 2014 version of the OECD Model.
As it appears Mr Ingvar Kamprad, the legendary (and charmingly self-belittling) founder of the worldwide IKEA empire (and ranking number 5 on Fortunes list of the world's billionaires), may have paid little attention to my article on treaty shopping and the problems involving the beneficial ownership test when he set up what is now considered his notorious Interogo Foundation in Liechtenstein.
This foundation, (like all other Liechtenstein foundations), has been shrouded in complete secrecy.1) Until, that is, just about a year ago when a probe conducted by a team of investigative journalists from the Swedish news organisation SVT (Sveriges Television) and Smålandsposten 2) revealed that Mr Kamprad and his family controlled Interogo and owned the IKEA trademark which is licensed to IKEA stores around the world. For the use of this trademark every store pays a 3 percent (tax deductible) royalty on their turnover to Inter Ikea Holding B.V., an indirectly, (through Inter Ikea S.A in Luxembourg), wholly owned Dutch company. By means of what appears to be a back-to-back royalty agreement between Inter Ikea Holding and Interogo – but there could be additional agreements and companies interposed in this stratagem – 70 percent of the royalties are subsequently passed on to Interogo.
Mr Kamprad, who is wellknown for his international tax planning strategies, has issued a spirited defence of his business structure, which he said was designed to preserve IKEA's long-term independence and financial strength. Referring to IKEA's use of financial havens such as Liechtenstein, the 85 year old Swede argued that ”tax efficiency” is a natural part of the company's low-cost culture. ”We have always viewed taxes as a cost, equal to any other cost of doing business”, he said in a statement, while insisting ”that IKEA paid taxes in every country in which it operates and complied fully with all laws and regulations”. (According to one report in 2005, out of earnings of several hundred million dollars, IKEA paid a total of 3.5% in tax.) 3)
In a recent statement to Dagens Industri, Mr Hans Gydell, the CEO of Inter Ikea Holding, has said that the ownership of the IKEA trademark has been placed for all eternity in the tax paradise Liechtenstein, ”and even if Mr Kamprad would so wish it would be impossible to break this up and transfer ownership elsewhere. It was precisely for the purpose of protecting the IKEA concept and trademark for the future that this very special and stable ownership arrangement was chosen and I have never heard him regret this decision.” According to a recent article in Smålandsposten (25 February 2012) which is based on an interview with Mr Kamprad, who is usually quite reluctant to give interviews, explains that there is a quite flexible kind of foundation in Liechtenstein allowing its statutes to be changed with short notice. For example, Interogo had recently changed its rules regarding the nomination of its board members. Until the end of 2010 changes of board member ship was determined by a trust in Canada (Appo Trust in Ontario) 4) which is presently being dismantled. All that has been known about this trust was that it was controlled by the Kamprad family. Smålandsposten and SVT have unsuccessivly tried to get official information hereabout but it appears that Appo Trust is of a kind that does not require registration in Canada. Today the appointment of board membership in Interogo is carried out by a special administrative council (Stiftungsrat) consisting of Ingvar Kamprad, Mathias Kamprad, Alfred Wiederkehr member of the boards of the Ingka and Ikea Foundations, Per Ludvidsson chairman of the board of the Ikea Group, Hans Gydell, board member of the Ikea Group, Johannes Stenberg personal assistent to Ingvar Kamprad, and Urs Wickihalder, Partner Bratchi, Wiedermeir & Buob (Zurich) and member of the Council of the Association of Swiss Grantmaking Foundations. Upon resignation from the board Ingvar Kamprad shall appoint his successor. This structure will remain also upon Invar Kamprad leaving the organisation. The information is somewhat nebulous as the statutes also provide that the Kamprad family is entitled to three members of the council and that four shall be non Kamprad family members. Upon the resignation of Ingvar Kamprad every council member including those of the Kamprad family shall appoint his successor but the Kamprad family can veto such decisions. The board of Interogo which is supervised by the administrative council consists of Herbert Oberhuber and Johannes Burger, partners of Marxer & Partner lawfirm in Liechtenstein. They appoint the board members of Inter Ikea Holding annually. The chairman of the board of this company is the wellknown Swedish Tax Law Professor Göran Grosskopf. In addition the company also has a Supervisory Board chaired by Mr Kamprad. Some of the statutes of Interogo remain secret. Paragraph 12 is quite clear on this point: ”These statutes including specific changes thereof and all other factual and legal circumstances affecting the Foundation may not be disclosed to outsiders, in particular not to foreign administrative bodies.”
Together with the legal ownership of the IKEA trademark and the hundred percent share holding in Inter Ikea Holding B.V. as reported above, it appears that Mr Kamprad and his family have total control of the financial affairs of the Interogo Group 5)
For tax purposes, the benefits of this arrangement is that the Netherlands has tax treaties with (probably) most of the countries where the IKEA stores are situated, treaties which reduce royalty taxes in most cases to nil percent in the source state instead of the quite considerable taxes which usually are imposed hereon under domestic rules of these countries. Also, which indicates that the choice of Netherlands for the establishment of Inter Ikea Holding is not haphazard, this country under its domestic tax regime does not impose any source tax on roylties paid to either Liechtenstein or any other countries. Thus, the money, apart from an arm's lenght profit margin being taxed in the Netherlands, winds up completely tax free in the hands of the Interogo foundation. And there is of course no tax in Liechtenstein.
If on the other hand the royalties had been paid directly from the IKEA stores to Liechtenstein there would allways be full domestic source taxes on the royalties because there is no country that has a tax treaty with Liechtenstein. (In Sweden source taxes on outgoing royalties are imposed in this case at the corporate tax rate of 26.3%.) To use the usual tax lingo Interogo has thus ”shopped” the Netherlands' treaties concluded with the IKEA store countries. Or, in other words, Interogo has used the Netherlands and Inter Ikea Holding as a ”shopping bag” for tax purposes for collecting its world wide royalties.
However, which has already been mentioned above, there is an important condition in the royalty clause of most tax treaties prescribing that the source state is obliged to waive its source tax only if the recipient in the residence state (the Netherlands) is the beneficial owner of the (royalty) income. In French ”bénéficiaire effectif”, in German ”Nutzungsberechtiger”. In Sweden´s tax treaties the obligation to reduce the source tax requires that the recipient ”har rätt till royaltyn”. If therefore, when interpreting this term one would conclude that the Interogo Foundation in Liechtenstein and not Inter Ikea Holding in the Netherlands should be considered the beneficial owner of the royalties the benefits under the article are to be denied and the source state can go ahead and collect from Inter Ikea Holding (not Interogo as suggested in the title of this article) its regular domestic source taxes on royalties.
At the introduction of the concept of beneficial owner in the 1977 Commentaries to the Model Convention the only clarification of this term that was given was that intermediaries such as an agent or nominee did not qualify as beneficial owners and were thus excluded from treaty benefits on receipts of royalties, (dividends and interest).
Ten years later in the Conduit Company report it was further emphasized that beneficial ownership should also be read in the context of its purpose, namely in the effort of the OECD to deal with tax avoidance. The Committee on Fiscal Affairs had expressed its concern about the improper use of tax conventions by persons acting through a legal entity with the main or sole purpose of obtaining treaty benefits which would not be available directly to such a person. In the words of the Report, it ”deals with the most important situation of this kind, where a company situated in a treaty country is acting as a conduit for channeling income economically accruing to a person in another State who is thereby able to take advantage 'improperly' of the benefits provided by a tax treaty. This situation is often referred to as 'treaty shopping'. The 'conduit company' which is characteristic of such schemes is usually a corporation but may also be a partnership, trust or similar entity.”
The key word in this statement is that the income channeled through the conduit company economically accrues to a person in another State rather than to the conduit company. Usually, according to the Report, (but which, as explained above, is not the case in the Interogo/Inter Ikea Holding scheme), the assets and rights that give rise to the (dividends, interest, or) royalties have been transferred to the conduit company enabling it to obtain the treaty benefits.
In the new 2011 OECD discussion draft emphasis is further placed on the ability of the recipient to have ”the full right to use and enjoy the income received unconstrained by any contractual or legal obligation to pass the the payment received to another person.” Moreover, and quite importantly, under section 4.4. of the draft, the OECD points out that the fact that the recipient of royalties is considered to be the beneficial owner of the royalties does not preclude the possibility to deny the benefits of the treaty in cases of abuse of the provisions described in the Commentaries to paragraph 1 of the Model Treaty. These include specific treaty anti-abuse provisions, generel anti-abuse rules and substance-over-form or economic substance approaches.
As can be gleaned from the above analysis about the meaning of beneficial ownership the determination hereof is quite a complicated and multifaceted affair and, which is important to mention, can be established only upon a thorough investigation of the facts and circumstances of each and every case. It is therefore not possible to give a final answer hereto with regard to the Interogo/Inter Ikea Holding arrangement. It is therefore justified that the statement made in the title of this paper is followed by a questionmark.
The head of the legal department of The Swedish Tax Administration Mr Tomas Algotsson has declared (Dagens Industri 27 January 2011) that he cannot say if a tax inquiry will be initiated against IKEA. He points out that he can only handle the Swedish legislation in this regard but not the tax consequences of the foreign operations of the company. Regarding the 3 percent royalty payments he finds that this must be determined by the rules of the treatment of intercompany payments. This arm's length problem is, however, a completely different issue specifically dealt with in paragraph 4 of article 12 in the Sweden-The Netherlands tax treaty. Mr Algotsson's statement thus indicates that no attention seems to have been paid by the Tax Administration to the beneficial ownership question laid down in paragraph 1 of article 12. Probably because of the secrecy that has surrounded Interogo and that its business structure has thus not been understood.
As implied above a determination of the beneficial ownership concept is a very difficult one and, as far as is known, it has never been tested by any tax court in Sweden. There are several reasons, however, why a probe into these matters would be interesting in the Interogo/Inter Ikea Holding setup. Firstly, and most importantly, the information that has surfaced about Interogo and the royalty payments in the last couple of months, albeit somewhat conflicting, is of such a scope and nature that a test of the beneficial ownership concept in this case is indeed warranted and could also in the process shed light on this elusive tax treaty problem in general. Secondly, an investigation of this kind could prove to be of enormous fiscal interest not only to Sweden but to all countries that have IKEA stores. Mr Kamprad has confirmed that Interogo has amassed a fortune of about 12 billion US dollars, (corresponding to about 100 billion (miljarder) Swedish crowns) in Liechtenstein. IKEA's homepage reports that there are 334 stores – and counting – in 40 different countries. The number of stores in Sweden is about 17. According to Wikipedia the combined turnover in 2007 of IKEA was 212 billion SEK. 3 percent thereof amounts to 6.36 billion SEK. The loss of tax revenue by the Swedish treasury alone from the royalty scheme is estimated at 100 million SEK annually (Dagens Industi 26 January 2011). Thirdly, it should be mentioned that Sweden has recently negotiated an agreement with Liechtenstein for exchange of information for tax purposes and that therefore it should now be possible for the Swedish tax authorities to obtain full information about Interogo.
The development of an investigation of this kind would no doubt be closely followed by the tax authorities in the 39 other countries that have tax treaties with The Netherlands with a beneficial ownership clause.
Stockholm 5 March 2012
peter@sundgren.net
Footnotes:
1.A Swedish translation of the statutes of Interogo are available at http://svt.se/content/1/c8/02/30/43/75/Stadgar_Interogo_Svenska.pdf. Noteworthy is the fact that there are no references therein to Mr Kamprad or IKEA whatsoever.
2. Bosse Vikingsson and Kenneth Gehrman, reporters at Smålandsposten, have been nominated to the journalistic award The Golden Spade for their unearthing of the Interogo scheme.
3The “Berne Declaration”, a non-profit non governmental Swiss organization that promotes corporate responsibility, has formally criticized IKEA for its tax avoidance strategies. In 2007, the Berne Declaration nominated IKEA for one of its Public Eye "awards", which highlight corporate irresponsibility and are announced during theWorld Economic Forum in Davos, Switzerland.
4. See paragraph 7 of the statutes of Interogo.
5. It should, however, be mentioned that this sharply contrasts with the information provided on IKEAs homepage which declares that the world wide IKEA concept is owned by Ikea Systems B.V. in The Netherlands and that the IKEA group and all franchisees make payments to the said company for the right to use the IKEA System and its continuing development and improvement. Also pointed out, and quite surprisingly, is that the relationship between Inter Ikea Systems B.V. and its franchisees is based on a business agreement between independent parties, (which for tax purposes would suggest that the royalty payments are not subject to arm's length tax considerations).
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