Foreign holding companies without substance

A Cyprus holding company had received dividends from Swedish subsidiaries. 

The Swedish Tax Agency (the “STA”) argued that the holding company lacked substance, since it had no employees, no physical premises, and no real operations in Cyprus. Its directors were registered in hundreds of companies, and asset management was handled by a Swiss bank. The majority of its income and assets were tied to operations outside Cyprus.

Although the Swedish general anti-avoidance legislation in the Swedish Tax Evasion Act does not apply to the WHT Act, the specific tax evasion provision under the WHT Act can apply to WHT payments, which prescribes a withholding tax liability for the beneficial owner of the dividend, if it holds a share in a way that another party thereby is granted an undue withholding tax advantage (e.g., a decreased withholding tax rate or exemption from withholding tax).

The STA argued that the holding company existed solely as a conduit to route dividends tax-free to its beneficial owner, a Swedish tax resident individual. Despite the owner paying Swedish income tax on the dividends received, the STA maintained that the Cyprus company was liable for withholding tax, as the owner and company are separate tax subjects (economic double taxation).

According to the Administrative Court, neither the arguments made by the Cyprus company nor the other information presented to the Court indicated that it was clearly incorrect for the STA to apply the tax evasion provision instead of the rule on tax exemption for dividends from a Swedish subsidiary. Reference was made to HFD 2017 not. 32 (an annulled advance ruling where the Tax Board for Advance Rulings had held that the tax evasion provisions do not apply to long-term holding structures) and the judgments of the Court of Justice of the European Union in cases C-116/16 and C-117/16, T Danmark and Y Denmark, EU:C:2019:135). 

The WHT Act does not specify a time limit within which the STA may retroactively impose withholding tax. Instead, the STA’s ability to collect such tax claims is governed by the general statute of limitations of ten years, as stipulated under the Swedish Statute of Limitations Act. The STA’s claim for withholding tax arises at the same time as the tax liability. Therefore, the STA may impose the tax within ten years from the date a liability arose. If the limitation period is interrupted, e.g. by a claim from the Tax Agency, the period is extended.

This possibility to apply withholding tax retroactively for up to ten years can be compared with the standard two-year review period for income tax purposes, with six years applying if the taxpayer has provided incorrect information or omitted to provide information. 

The Administrative Court's decision reinforces the beneficial ownership approach developed in T Danmark and Y Denmark, and may be an indicator of increased scrutiny by the Swedish administrative courts. Further guidance on substance-over-form approach was provided in the judgement of the Court of Justice of the European Union in Case C-228/24 (please see further our article above), where the Court emphasised the need thoroughly assess cross-border corporate structures and underlined the role of genuine commercial purposes in upholding tax exemptions under EU law.