Newsletter

Ruling on corresponding adjustments under the Nordic tax treaty

by Ebba Perman Borg

Published:

People

On 24 November 2024, the Swedish Supreme Administrative Court (Sw. Högsta förvaltningsdomstolen) delivered a landmark ruling, addressing the issue of corresponding adjustments under Article 9.2 of the Nordic Tax Treaty.

Background

A Swedish company had granted a loan to its Norwegian subsidiary. The Norwegian tax authorities adjusted the income and disallowed a portion of the interest deduction claimed by the Norwegian subsidiary, based on the loan terms not being at arm's length. Consequently, the Swedish parent company sought a corresponding adjustment under Article 9.2 of the Nordic Tax Treaty to prevent double taxation by having its interest income in Sweden adjusted down. The Swedish Tax Agency denied the request, claiming that the Norwegian adjustment was not justified.

Lower court proceedings

The company appealed Tax Agency's decision to the Administrative Court (Sw. Förvaltningsrätten), which ruled in favour of the company and granted the corresponding adjustment. The Tax Agency appealed to the Administrative Court of Appeal (Sw. Kammarrätten), where the decision was reversed. The Administrative Court of Appeal held that courts are not authorised to apply Article 9.2 of the Nordic Tax Treaty for such adjustments. The Administrative Court of Appeal held the view that any corresponding adjustments should be determined by the competent authorities (the tax authorities of Norway and Sweden) through the so-called MAP procedures.

Supreme Administrative Court's Ruling

The Administrative Court of Appeal's decision was appealed to the Supreme Administrative Court (the "Court"), which overturned the decision. The Court affirmed that both the Tax Agency and the administrative courts are required to apply provisions of tax treaties, including Article 9.2 of the Nordic Tax Treaty. The Court emphasised that if the Tax Agency denies a corresponding adjustment and the decision is appealed, it is within the jurisdiction of the administrative courts to assess the validity of the Tax Agency's decision. The Court also noted that the Tax Agency's authority to engage in discussions with foreign tax authorities does not preclude judicial review of adjustments under Article 9.2.

The Court returned the cases to the Administrative Court of Appeal for substantive examination.

Swedish and Norwegian closing remarks

The decision underscores the courts' role in interpreting and applying international tax agreements, ensuring that taxpayers have judicial recourse to address double taxation issues arising in cross-border transactions.

The ruling is expected to have broad implications, as Article 9.2 of the Nordic Tax Treaty aligns with Article 9.2 of the OECD Model Tax Convention, suggesting that the Court's reasoning may extend to other tax treaties Sweden has entered into.

We furthermore expect Norwegian courts to apply the same view in similar Norwegian cases where a taxpayer is seeking corresponding adjustments under one of Norway's tax treaties that are based on the OECD Model Convention. The Norwegian Supreme Court has previously (in Rt 2011 p 1581 Dell) stated that foreign court decisions on the interpretation of tax treaties based on the OECD Model Convention is a valid source of law for the interpretation of Norway's tax treaties that are based on the Model Convention, such as for instance the Nordic Tax Treaty.

Do you have any questions?