WebJournal on International Taxation in Sweden no 4/2013
The SAC ruling.
From this standpoint, which I believe is the main aspect of the reasoning of the ARB, the board underlines that the comparison of the two situations must take into account both the the sale by Salénhuset AB of the real property to the partnership and the subsequent sale by Candice Ltd. of its shares in the partnership to an outside buyer. With this in mind the deferral of tax allowed under the rules of the Swedish sub market price rules is recaptured if Candice Ltd. had been a Swedish company. So the refusal under the GAAR of applying the submarket price rules does not give rise to any detrimental tax treatment of the tax payer(s).
The Cyprus case1
– BEPS illustrated.
by Peter Sundgren
Introduction
BEPS, Base Erosion and Profit Shifting,
is on everybody's lips these days. Just recently the G 20 ”banged
its fists” mandating that this kind of tax behavior must be
stopped.
The Salénhuset AB case, an advance
ruling, delivered by the Swedish
Supreme Administrative Court (SAC) case 4799-10, (Billum, Dexe,
Jermsten, Stenman, Saldén Enerus) 30 May 2012 is an illustrative
example of BEPS.
The case has
stirred up a lot of frustration within the Swedish international tax
community, the main reason being that the decision, invoking the
Swedish general anti avoidance regulation GAAR, disqualified the tax
strategy set up by Salénhuset AB giving rise to very substantial
sums of tax to be paid by not only Salénhuset but also by a number
of other large real property holding companies in Sweden. The Swedish
Tax Administrations has identified some 100 cases which according to
Dagens Industri, June 18 2012, may trigger tax payments of 15 – 20
billion SEK.
In
what seemed to be a justification and defence of the tax strategy
that had been adopted, Mr, Martin Nilsson, Chief Tax Partner of
Mannheimer Swartling Law firm, published a nine page article in
Svensk Skattetidning number 4/2012 p. 397 sharply criticizing the SAC
for its decision. Also, Mr. Per Holstad of Skeppsbron Skatt has
written a very critical article in Skattenytt page 568/2012. In
contrast I wrote a quite sympathetic – and pro fiscal - report
about the case titled ”Satisfactory outcome of the Cyprus case”
(Välkommen utgång i Cypernmålet.) where I took issue with and
rejected some of Mr. Nilssons arguments, in particular his ideas
regarding the effect of EU law considerations. It is written in
Swedish and available on my blog www.petersundgren.blogspot.com.
July 2012. (The article had previously been denied publication by the
editorial board of Svensk Skattetidning, a board of which,
incidentally, Martin Nilsson is a member.)
In addition to
disqualifying Salénhuset AB's tax avoidance scheme both the Advance
Rulings Board (ARB) (Skatterättsnämnden) and the SAC also rejected
the company's suggestion that the application of the Swedish GAAR
violated the principle of free establishment under the EU Treaty. And
this is what the rest of this article is all about.
As just mentioned
I gave attention to this question also in my earlier blog article but
new light has been shed on this matter since I obtained from the SAC
a copy of a legal opinion on this matter written by one of Sweden's
leading experts on EU tax law, Mr Björn Westberg, Doctor at Law and
Professor of Fiscal Law at the Jönköping International Business
School. Considering that both the ARB's and Mr. Westberg's opinions
are of interest to a wider public I have been spurred to write this
(second) article on Salénhuset AB and this time in English.
The tax avoidance strategy
Salénhuset
AB's plan was as follows: The company owned real property situated in
Sweden which it intended to sell to an outside buyer, a transaction
which which would give rise to a substantial gain and which of
course would also give rise to normal Swedish business taxation at
about 25% tax. In order to avoid paying this tax Salénhuset AB
formed a wholly owned Cyprus company, Candice Ltd. Together,
Salenhuset AB and Cancice Ltd. then set up a Swedish partnership,
which under Swedish tax law is a transparent and non- taxable entity,
in which Candice Ltd. would hold a 99.9 percent stake and Salénhuset
AB the resulting 0.1 percent. Salénhuset AB would then sell its real
property to the partnership which under Swedish tax law regarding
transfers of assets between companies in the same group can be done
at submarket value aquisition cost thus deferring a taxation of the
capital gain on the sale. Subsequently Salénhuset AB and Candice Ltd
would sell their shares in the partnership to the outside buyer. The
sale by Candice Ltd would be tax free in Cyprus and also exempted
from tax in Sweden under Swedish domestic tax law. (Mr. Westberg has
erroneously stated that Candice Ltd's. tax exemption in Sweden is due
to the tax treaty between Sweden and Cyprus.) The only tax to be
collected from this sale of the shares in the partnership would thus
be the Swedish business tax on the 0.1 percent of the shares held by
Salénhuset AB. Thereafter, which however was never mentioned nor
discussed in the case, the profit collected by Candice Ltd. on its
99.9 percent of the sale of its Swedish partnership, would be
repatriated back to Salénhuset AB a transaction that also would be
tax free in both Cyprus and Sweden. More hereinafter. Thus, the
combined tax to be paid under this sequence of transactions also
upon repatriation to Sweden of the capital gain/profit
made by Candice Ltd. would only be the above mentioned Swedish
business tax on 0.1 percent of the market value of the sale of the
partnership shares owned by Salénhuset AB. We are thus witnessing a
BEPS strategy where 99.9 percent of a Swedish source tax base is
eroded and the profit shifted in three taxfree stages ,first into a
tax transparent partnership in Sweden, then into a tax exempt entity
in a tax haven and ultimately repatriated back to the original owner
of the real property in Sweden.
The
main issue of the case, as afore mentioned, was whether or not the
Swedish GAAR could be invoked against this tax setup. Both the ARB
and, on appeal, the SAC found unanimously
that such was the case, i.e the GAAR was applicable with the
consequence that Salénhuset AB was denied the relief of the
submarket transfer of the real property to the partnership. The
company would thus be taxed at full market value for the transfer of
the real property to the partnership.
The ARB's ruling regarding EU law
issue.
If the ARB should
apply the GAAR, Salénhuset AB also requested a ruling whether or not
this would violate the EU Treaty's principle of free establishment in
the Community.
On
this issue the ARB ruled as follows: ”The
ARB's application of the anti avoidance rule means that the transfer
of the real property to the partnership is deemed to have taken place
at market value of the property. The question arises whether a
corresponding taxation would arise if the dominating owner of the
partnership were a Swedish company instead of a Cyprus company.
In determing
whether a treatment to the detriment of the tax payer (negativ
särbehandling) has ocurred, the comparison, according to the ARB,
must comprise both the sale of the real property to the partnership
and the alienation of the shares of the partnership. If the
dominating owner had been a Swedish company, the capital gains
taxation of the alienation of the shares to an external buyer would
have taken place according to normal rules (giving rise to taxation
in Sweden – my clarification). The tax relief provided by the sub
market price of the sale would then be the basis for this taxation.
Under such circumstances the ARB considers that the cross-border
transaction does not give rise to any detrimental tax treatment of
the tax payer.”
Mr Westberg's
legal opinion regarding the EU law issue.
In appealing this
ruling to the SAC Salénhuset AB submitted a legal opinion by the
above mentioned Mr Björn Westberg, He wrote as follows, (my
translation):
-------------------------------------------------------------------------
Björn Westberg
Legal opinion 2011-08-01
Statement regarding the EU law
consequences of decision 73-09/D by the Advance (Tax) Rulings Board,
ARB, (Skatterättsnämnden) 2010-07-02.
1.Assignment
Bill Andréasson, barrister, has
solicited me to determine whether ruling 73-09/D delivered by the
ARB 2010-07-02 is compatible with the the principles and regulations
of EU law. My opinion makes reference to the notations of the ruling.
X AB (=Salénhuset AB, my comment))
is a Swedish comany (limited) , that holds 0.1 percent of a Swedish
partnership together with a wholly owned Cyprus company, Y Ltd
(=Candice Ltd., my comment), holding the remaining 99.9 percent of
the partnership. X AB intends to transfer Swedish real property to
the partnership in accordance with the rules allowing a deferral of
taxation on intra group transfers of assets (sub market price
transfers) (=underprisöverlåtelser).
2. Summary
In my opinion any ruling on Swedish
law must always take into consideration the basic principles of EU
law. Both articles 43 EG and 48 EG regarding free establishments
within the Community and article 58 EG on free capital transfers
constitute an obstacle to the the ARB's interpretation of Swedish
national law. The sub marketprice transfer of assets by a Swedish
company to a Swedish (group) partnership of which 99.9 percent is
held by a company established under the rules of another EU member
state where it has its legal seat, would, according to the ARB's
decision, upon the subsequent sale by X AB of its 0.1 percent holding
in the partnership, trigger full taxation of X AB of the sub market
price transfer to the partnership instead of being taxed only of its
0.1 percent holding of the partnership. The consequence hereof sets
aside the normally applicable rules of (tax free) intra group sub
market transfers as X AB is held liable to tax for the full market
value of the real property transferred to the partnership. The ruling
primarily addresses the right of free establishment (within the EU).2
In my opinion the legal situation is
completely clear. The ruling by the ARB is in violation of the
principles of free establishment under the Treaty.3
If the Supreme Administrative Court, (the SAC), does not share my
opinion of the EU legal aspects, there is an obligation for it under
article 267 of the EU Treaty to apply for an advance ruling from from
the EU Court, as such an interpretation would violate established
practise.
3. The ARB's decision
The ARB has determined that the
General Anti Avoidance Regulation (GAAR) (1995:575) is applicable
with the motivation that ” (at) the subsequent sale of the shares
of the partnership at market price almost the whole capital gain will
escape taxation as Y Ltd, is not liable to taxation in Sweden nor in
Cyprus. This has the additional effect that the corresponding share
of the tax relief that follows from the deferred tax of the submarket
transfer of the real property to the partnersip becomes final.”
The ARB adds, that ”due to the ownership conditions of the
partnership the intra group sale has the effect that nearly the whole
gain is transferred from X (AB) to Y (Ltd.). The final tax relief for
the group arises because Y (Ltd.) is not liable to capital gains
taxation on its sale of its share of the partnership. Thus, the ARB
considers that the final tax relief arising from the procedure is in
violation of the purposes of the rules on the sub market price
transfers (between group companies). Therefor, also the conditions
for application of 2 § 4 of the GAAR are satisfied”. The
reasoning of the ARB leads to an unequal treatment compared to the
situation where the partnership had been owned by Swedish individuals
or legal persons. In such cases each share owner is taxed on its part
of the transferred shares where the GAAR would not have been
applicable. In its ruling the ARB invalidates the transfer by X AB of
the real property to the partnership under the sub market price
transfers regulations and levies tax on X AB at full market price,
i.e. a clear unequal treatment compared to a situation where there
would have been only Swedish holders of shares in the partnership.
The ARB declares that Y Ltd. is not
liable to taxation in Sweden nor in its domestic jurisdiction. It is
true that Y Ltd. is not subject to Swedish taxation for the sale of
its shares in the partnership, but this is due to the pertinent tax
treaty and domestic Swedish law. According to the Sweden-Cyprus tax
treaty of 1989, article 13.1, gains arising from the alienation of
shares in a company whose main assets consist of real property may be
taxed in the State where the property is situated. However, as Y
Ltd.'s shares in the partnership are not allocated to a permanent
establishment in Sweden there is no justification for taxation in
Sweden. Whether or not Cyprus taxes the relevant gains is irrelevant.
Nevertheless, the ARB ought to have reported the legal basis for the
non-taxation of Y Ltd. in its home jurisdiction. Established practise
by the EU Court shows that congruence of the national systems in
cases similar to the present one is not achieved by correcting
mechanisms, in this case by not applying the rules on sub market
price transfers, but by the result of the reciprocate treatment of
the tax treaty of the Contracting States. The EU Court has pointed
out that where ”Sweden has concluded tax treaties with other Member
States the congruence in the case is upheld by the domestic court not
at the individual level by strict accordance between the deferral of
the taxation of the market price and the final taxation thereof, but
on another level by the reciprocity between the Contracting States of
the rules applied. These rules are laid down in such treaties on the
basis of forces of attraction with the purpose of dividing the taxing
rights which the Contracting Staets are free to determine as long as,
as the case at the national court, no EU laws have been issued.”4
The court case refers to a deferral of taxation, but the basic EU law
principles laid down therein are wholly applicable to sub market
price transfers of the kind occurring in the X AB and Y Ltd. Case.
The ARB points out that the
circumstances in the pertinent case in its essential parts correspond
to those of (SAC ruling) RÅ 2009 not 86 where the Court found that
the procedure violated the purposes of the legislation on sub market
price intra group transfers. Thus one can establish that the ARB
compares different situations. The conclusion, therefor, is in
conflict with the principles under EU law of equal treatment.The
prohibition against discrimination, which also is embedded in the
principle of equal treatment, suggests that comparable situations are
to be treated equally, unless a separate treatment is objectivly
justified. Comparable situations may not be treated differently, and
different situations may not be treated in the same way unless for
special reasons. In the pertinent case one must allways try to find
similar cases.5
RÅ 2009 not. 86 describes a purely Swedish situation. The pertinent
case addresses a situation about a final tax relief of a kind that
differs from the domestic case explored in RÅ 2009 not 86.
4. Basic EU law principles.
The decision by the ARB constitutes
a clear restriction on free establishment as expressed in article 43
of the EU Treaty. The different treatment is expressed as a denial
of the application of the rules on sub market price intra group
transfers for tax purposes when the gain on the subsequent alienation
of the shares of the Cypriot shareholder cannot be taxed in Sweden.
The ARB notes: ”If the dominating shareholder had been a Swedish
company the taxation of the capital gain on the sale of the shares to
an independent buyer would be governed by ordinary rules. The tax
relief allowed at the (preceeding) sub market price intra group
transfer would then provide the base for the taxation.” The
different treatment of transactions carried out by a shareholder of
another Member State would thereby be clearly demonstrated. The
result is a clear difference of tax treatment in the Member State, in
this case Sweden, where the sub market price intra group transaction
occurs. In contrast to firmly established practise the decision
restricts the freedom of establishment for the Swedish company X, who
wholly owns the shares of the Cypriot company Y Ltd. X AB
unquestionably can influence the decisions of Y Ltd. and can control
its activities.6
5. Can the ARB's interpretation of
national law be justified?
Established practise by the EU Court
has demonstrated in which situations a restriction of the freedom of
establishment can be justified in consideration of public interest.7
Such restrictions may be implemented if either a carefully conducted
apportionment of the tax base is disrupted or as a means to
counteract tax avoidance. The restrictions must, however, be
justified for the safeguarding of the purpose of the legislation and
must nt obe too far reaching in that respect 8
The first mentioned case focuses on
the principle that costs should primarily be borne by the member
state where the income is generated.9
The EU Court has literally pointed out, ”that there must be a
direct connexion between the pertinent advantage and and the
compensation therefor by the tax levy”,10
Such connection, however, does not exist in this case. The reduction
of the Swedish tax that could follow where a shareholder of other
member states were not treated in the same way as a Swedish
shareholder cannot ”be considered as any such obliging concern of
public interest that can justify a separate treatment that violates
article 43... Such a purpose is namely of a pure economic character
and cannot, according to established practise, be considered as an
obliging public interest concern”.11
Nor does the case describe a situation where a parent company may
choose if taxation shall take place in one or the other member state,
which according to the EU Court under certain circumstances can
justify the national tax treatment.12
”If it were granted that the residence state could allways invoke
separate treatment merely because a company has its seat in another
member state, it would render article 43 EG completely meaningless.”13
The other case focuses on ”ficticous
structures used for the purpose of eluding the legislation of the
member state.”14
To invoke taxation in accordance with the general anti avoidance
regulation amounts to a separate treatment of a company than with a
wholly owned subsidiary established in another member state.
According to established practise by the EU Court a general
presumption for tax avoidance cannot be based on the fact that the
subsidiary is established in another member state. It cannot justify
(the application of) a provision that infringes upon basic princples
of freedom guaranteed by the Treaty.15
Moreover, measures considered to safeguard the domestic tax base must
also take into account the principles of proportionality of the EU
law. 16
The rules on sub market price intra group transfers have been imposed
to enable changes of group structures by preventing a triggering of
taxation on such measures. As demonstrated by the ARB tha application
of the general anti avoidance regulations will prevent the the
profits of transactions carried out in complete accordance with the
rules on sub market price intra group transfers from becoming
untaxed. The concluding argument is comes to expression by the ARB
itself when stating that ”the final tax relief for the group occurs
because Y Ltd. is not liable to taxation for its gain of the share of
the partnership.”. Thus, the ARB deviates from established
practise laid down by the EU Court.
In this case the decision by the ARB
amounts to a handicap for the Swedish parent company which, by the
application of the general anti avoidance regulations, is taxed for
the full market price on the transfer of real property to the jointly
held partnership based on the fact that the wholly owned Cypriot
company on the (subsequent) transfer of its shares in the partnership
would ot be subject to tax, at least not in Sweden. This constitutes
a clear obstacle to establishments in another member state.
”According to firm practise this also means that even if the
purpose of the rules on free establishment in the Treaty, according
to its wording, is to secure national treatment in the receiving
member state, these rules also prohibit the source member state from
preventing a member state citizen or company festablished under the
laws of the source member state from setting up (a business) in
another member state.”17
A taxation of this kind constitutes in this case a serious obstacle
to company restructurings involving subsidiaries in other member
states.
Björn Westberg
Doctor at Law, Professor of Fiscal
Law
2 See for instance C-524/04 Thin Cap Group Litigation, REG 2007 p. I-2107, p.27; C 102/05 A och B (Skatteverket mot A och B), REG 2007 s I-3871, p. 27
3. See primarily case C-436/00 X and Y (X and Y versus Tax Administration), REG 2002 s. I.10829, p. 65, 70, 74 and 75; see also case C-311/08 SGI (Societé de Gestion Industrielle SA (SGI) versus Belgian State), REG 2010 s. I-0000, p. 28, 36 and 38-40, where the EU Court at p. 40 clearly has indicated that the company seat is decisive for determining the force of attraction to the legal system of a member state.
4See case C-436/00 X and Y, REG 2002 s. I-10829, p.53; see also case C 80/94, Wielockx, REG 1995 s.I-2493, p. 24
5For instance, when determining the tax base for value added tax purposes transactions at no compensation shall not be compared to transactions at levels below or above market price, see case C-250/10 Campsa Estaciones de Servicio, REG 2011 s. I-0000, p. 30; see also e.g. Påhlsson, Robert, Likhet inför skattelag – likhetsprincipen och konstruktionen av jämförbarhet i skatterätten (2007), s. 108-109.
6See primarily case C-436/00 X and Y, REG 2002 s. I-10829 p. 24-37 and 39
7E.g. See case C-311/08 SGI, REG 2010 s. I-0000, p. 56, 61, 63, 65 and 69.
8See case C-231/05 OY AA, REG 2007 s. I- I-6373, p. 44
9A disallowance of the deduction could be justified in such a situation, see e.g.case C-204/90 Bachmann, REG 1992 s, I- I-249, p. 28, 32 and 37
10See case C-96/08 CIBA, REG 2010 s. I-0000, p. 47
11See case C-436/00 X and Y, REG 2002 s. I-10829 p. 50; see also cases C-264/96 ICI, REG 1998 s. I 4695, p. 28; C-307/97 Saint-Gobain ZN, REG 1999 s. I-6161, p. 50; C-35/98 Verkooijen, REG 2000, s. I-4071, p. 48; the combined cases C 397/98 and C 410/98 Metallgesellschaft, REG 2001, s. I-1727, p. 59
12See e.g. Cases C-446/03 Marks & Spencer, REG 2007, s. I-6373 REG p. 46; C 231/05 OY AA, REG 2007 s. I-I-6373, p. 55; C 311/08 SGI, REG 2010 s. I-6373, p. 62; C-337/08 X Holding, REG 2010 s. I-0000 p. 29.
13See case C-337/08, X Holding, REG 2010 s. I-0000, p. 23
14See case C-311/08 SGI, REG 2010 s. I-0000, p. 65; C-446/03 Marks & Spencer, REG 2007, s. I-6373 p.57.
15My expression is only an adaption to this case of the language in case C-436/00 X and Y, REG 2002 s, I-10829, p. 61-62, see also case C-478/98 The Commission versus Belgium, REG 2000, s. I-7587, p. 45
16See e.g. Case C-028/95 Leur-Bloem, REG 1997 s. I-4161, p. 44; C-324/00 Lankhorst-Hohorst, REG 2002 s. I-11779, p. 33.
17See case C-102/05 A and B (Tax Administration versus A and B), REG 2007 s.I-3871, p. 24
The SAC ruling.
The
SAC, as mentioned above, also invoked the Swedish GAAR. But even
before doing so, and seemingly ignoring completely all the
intellectual effort put into this matter by both the ARB and Mr
Westberg, the SAC completely dismissed the whole problem regarding
the EU law matter. Over three lines of text one reads: ”The
SAC finds that nothing of importance has been demonstrated to suggest
any involvment in the case of EU law. The motion that a ruling hereon
should be requested from the European Court of Justice is therefor
rejected.” Full stop.
No one to my
knowledge has ventured to give an explanation of this peculiar
ruling. My own interpretation is simply that the matter concerns a
Swedish company that sells real property situated in Sweden to a
Swedish partnership and that, therefor, this does not involve any
other state than Sweden. One can of course understand that it would
have been very embarrassing for the SAC if it had submitted the case
to the ECJ and then have it returned with their own explanation i.e.
that the matter had nothing to do with EU law!
It
is, however, highly unsatisfactory that the SAC has not given a
proper explanation of its ruling and one can agree with Martin
Nilsson's statement – if not its rhetoric - in his above mentioned
article that the SAC ”again
has created substantial uncertainty of the legal situation and that
it does not live up to the standards that can be expected from a
supreme court”.
But back to the
ARB's decision and Mr. Westberg's objections thereto:
The task to be
fullfilled is to establish whether the tax payer(s) by the
application of the Swedish GAAR has suffered a negative or
detrimental tax treatment (negativ särbehandling) according to EU
law, depriving them in this case of a relief that follows from a
deferral of tax under our rules allowing submarket price sales of
assets between group companies. Under general common market
principles, as considered by Mr. Westberg, such deferral of taxation
must be granted also when the pertinent group company involved is
situated in another member state of the EU. And the question to be
asked in this case, as suggested by the ARB, is if a corresponding
taxation would have ocurred if the dominating owner (Candice Ltd.) of
the partnership would have been a Swedish company instead of a Cyprus
company.
From this standpoint, which I believe is the main aspect of the reasoning of the ARB, the board underlines that the comparison of the two situations must take into account both the the sale by Salénhuset AB of the real property to the partnership and the subsequent sale by Candice Ltd. of its shares in the partnership to an outside buyer. With this in mind the deferral of tax allowed under the rules of the Swedish sub market price rules is recaptured if Candice Ltd. had been a Swedish company. So the refusal under the GAAR of applying the submarket price rules does not give rise to any detrimental tax treatment of the tax payer(s).
But Mr Westberg's
approach focuses only on the first transaction, i.e. the sale of the
real property by Salénhuset AB to the partnership. And then of
course, by disallowing the application of the submarket pricing rules
on the sale of the real property to the partnership, it is fair to
say that a negative tax treatment will arise in the case where
Candice Ltd. is a Cyprus company as our intra group sub market sale
rules only would apply if Candice Ltd. had been a Swedish company.
So
the ARB on the one hand and Mr Westberg on the other hand have
adpoted different approaches for determining whether or not EU law
has been violated. The ARB looks at both
the sale by Salénhuset AB of the real property to the partnership
and
the sale by Candice Ltd. of the shares in the partnership, whereas Mr
Westberg has limited his comparison of the different tax results
arising from only the first transaction, the sale of the real
property. He finds, without further explanation, that the question
whether or not Cyprus taxes the subsequent gains on the sale of the
shares and the consequences thereof is irrelevant.
This, however, is
not a matter of fact but a matter of opinion and it would have been
more interesting if Mr Westberg had put forward his arguments for
rejecting the ARB's standpoint instead of just dismissing them as
irrelevant.
In my view, and
considering that the tax planning strategy involves two transactions
by two companies in the same group, it seems appropriate that the EU
question of detrimental treatment should be determined with regard to
the final tax resulting from the combined procedure. The attitude
taken by Mr Westberg to single out just one of the links of the chain
of transactions where every such link must hold to achieve a
successful outcome of the tax avoidance strategy is too simplistic.
And this brings me
to a further important aspect of the strategy adopted by Salénhuset
AB which I have already touched upon above and which I also brought
up in my earlier article: The tax planning does not consist only of
the two steps discussed but also of the repatriation of the gains
derived by Candice Ltd. upon its sale of its shares in the
partnership. What is supposed to happen to this money? I believe one
can take it for granted that the plan has been to eventually
repatriate it to Sweden. What other purpose could a Swedish real
property holding company have of a lot of funds winding up in a
Cyprus letter-box subsidiary?
This repatriation
can be done either by Salénhuset AB selling its shares in Candice
Ltd. with its (only) cash asset to an outside buyer or by bringing
home a dividend from Candice Ltd. A sale of Candice Ltd. is tax free
under Swedish tax law. A dividend payment between common market
companies is governed by the EU parent/subsidiary directive exempting
the dividend from source withholding taxes (in Cyprus in this case)
and from income tax in the country of the recipient (Sweden). The
reason and the underlying purpose of these rules is of course to
encourage cross-border investments within the Community and, on a
reciprocal basis, to allow the profits arising from such foreign
investments to flow tax free back to the investor. But in this case
the profits have arisen not in Cyprus but in Sweden from the
appreciation of Salénhusets AB's real property situated in Sweden.
Candice Ltd. is a company which has contributed nothing to the
business of the Salénhuset AB group. (It has in fact only given rise
to expenses for company formation, management etc.) Can it be
conceived that the authors of the parent/subsidiary directive had in
mind that such a step by step profit shifting of income arising in
Sweden and transported to and from Cyprus should also benefit from
the common market reliefs? I would strongly suggest that the answer
is no. A reason supporting this argument is that the directive
contains a special abuse clause disallowing the reliefs thereof in
such cases. And I firmly consider that the whole tax strategy adopted
by Salénhuset AB is a blatant example of such abuse. With all this
in mind, i.e, also the repatriation of the gain back to Sweden, maybe
the SAC would have been prompted to submit the case to the ECJ for a
ruling on EU law!
It is unfortunate
that Salénhuset AB in its advance ruling application has not opened
up for the ARB and the SAC for a discussion also of the repatriation
of the profits from Cyprus to Sweden so that the whole tax strategy
is laid bare. Alternatively one could say that it was a mistake by
the courts not to oblige Salénhuset AB to include this transaction
for examination.
A couple of years
ago I wrote a long article about our Swedish tax avoidance measures
and their relation to EU law focussing mainly on CFC matters
(”Swedish CFC Taxation and the Business Purpose Concept”)
specifically the point whether Sweden could enforce its CFC rules
regarding controlled companies established in the EU. This article
has been published in Tax Notes International, Volume 50, Number 2,
April 14, 2008.
The
article discusses mainly the ruling by the ECJ in the Cadbury
Schweppes case ((C196/04), Doc 2006-19082 or 2006 WTD 177-8) where
the ECJ gave further evidence of earlier opinions denying common
market reliefs for ”wholly artificial arrangements” designed to
avoid national taxation in the membership countries. The Court
emphasized that an actual business must be performed by the
controlled company in its host country for an indefinite period of
time. It eloquently described this as an ”endeavor
to assist in the economic and social interpenetration within the
Community by means of establishing a subsisiary in the host member
state”. Controlled
companies that were mere ”letterbox companies”, the Court
continued, should thus not qualify for common market freedoms. It
would be absurd to suggest that Candice Ltd. has endeavored to assist
in the economic and social interpenetration of Cyprus.
In my
Tax Notes International article I made reference to Stig von Bahr, a
former judge of both the SAC and the ECJ, who had also written a
paper regarding tax avoidance and community law and the Cadbury
Schweppes case, which was published in Skattenytt 11/2007 pp.
644-651, where he demonstrated that the ECJ maintains a strong
aversion to the acceptance of artificial arrangements. He further
concludes regarding non-harmonized legislation such as direct tax
legislation that if a transaction or arrangement within the Community
constitutes ”pratique
abusive or abus de droit”
under Community law, the liberties provided under the EC Treaty are
not available. Thus, only if the tax payer can convincingly
demonstrate that he has sound business or other non-tax motivations
for his behaviour and that there is no ”abus de droit” the member
state cannot enforce its domestic anti-avoidance legislation or other
similar measures.
In
its ruling in Salénhuset AB the SAC has concluded that the company´s
behaviour is charachterized by ”artificial
arrangements (konstlade förhållanden) that clearly have had nothing
to do with the organisation of its business operations”. A
wording which embraces that of the ECJ in Cadbury Schweppes.
In my opinion,
there is a big difference between situations where the application of
a membership state´s domestic anti-avoidance measures is invoked
compared to a situation where a straight reading or interpretation of
a member state law may be considered to interfere with EU law. In
the first case we are dealing with a behaviour where the tax payer is
adopting artificial arrangements completely disconnected from any
”endeavors to to assist in the economic or social interpenetration
of the community,” and deliberately is attempting to benefit from
inconsistencies or loopholes in the legislation whereas this, of
course, is not otherwise the case. Therefor, if the ECJ finds that
tax avoidance has occurred under domestic rules in a member state it
will ”follows suit” and not ”give salvation” for the tax
avoidance.
In other words one
could suggest that a tax avoider is not entitled to the same level of
equal rights under EU law. Ulrika Rosander, also a scholar of the
Jönköping International Business School, in her (quite brilliant)
doctoral thesis on the GAAR (Generalklausul mot skatteflykt, JIBS
Dissertation Series No. 040) boldly suggests that taxpayers engaging
in transactions that lack economic substance should not be entitled
to the same degree of legal security.
Consequently, I
believe that the EU judges, considering Salénhust AB's tax bill on
only 0.1 percent of its profits also after repatriation thereof to
Sweden,would have been impervious to any claims from the company that
it had suffered from ”negativ särbehandling”. They would sit
with their hands folded.
International tax
planning strategies in Sweden very often make use of companies set up
in various countries with favourable tax rules and/or apply treaty
shopping maneuvers designed to avoid taxation completely. And
invariably these companies lack completely any economic substance.
They are mere letterbox companies existing only as paper
constructions in the drawers of the investors' legal counsels. These
companies usually are artificial arrangements giving no assistance to
the economic or social interpenetration of their host countries.
I applaud the
ARB's approach to the EU law problem discussed in this article and I
welcome the fact that both the ARB and the SAC have found that their
are limits to BEPS.
Stockholm November
2013
peter.sundgren@gmail.com
070 491 76 70
070 491 76 70
1
In accordance
with anglosaxon court practise and also that of the European Court
of Justice (ECJ) , (and above all in order to avoid confusion with
future cases where Cyprus may be involved), I prefer to identify the
ruling not as the Cyprus case but by the name of the tax payer, the
Swedish company Salénhuset AB.
