Withholding tax on dividends to foreign public pension institutions is contrary to EU law

Schjødt has previously reported on the ongoing case between the Swedish Tax Agency and three Finnish public pension funds. See our newsletter from 5 July 2024 for information on the Attorney General’s legal opinion of the case from earlier this year.

In the three domestic cases which were forwarded to the CJEU for a preliminary ruling, three Finnish public pension funds – Keva, Landskapet Ålands pensionsfond, and Kyrkans Centralfond – had respectively applied for a refund of paid withholding taxes on dividend distributions from Swedish companies. The refund applications had been denied by the Swedish Tax Agency. The Finnish public pension funds had based their refund applications on the argument that denial is contrary to the free movement of capital as set out in the Treaty on the Functioning of the European Union, since the comparable Swedish public general pension funds, i.e., the so‑called AP‑funds, are exempt from tax. In Sweden, the AP‑funds benefit from tax exemption since they are governed by public law and are part of the Swedish State. The purpose of the Swedish AP‑funds is to manage the capital which constitutes, in part, the income‑based old‑age pensions and forms part of the Swedish pension scheme. The pension scheme itself forms part of the public and compulsory social security system.

The CJEU initially noted that there is an apparent restriction on the free movement of capital in the case, following the disadvantageous treatment of dividend distributions to non‑resident public pension institutions governed by public law as opposed to those paid to resident ones. On the question on whether the situations are comparable, the CJEU stated that the objective pursued by the domestic rules must be examined. The purpose of the exemption from tax, which public bodies such as the AP‑funds benefit from, is to avoid a circular flow of the Swedish State’s public resources, i.e., to offset the tax which they would otherwise have to pay. However, as noted by the CJEU, the fact that a pension fund is part of the Swedish State does not necessarily place it in a different situation from that of a non‑resident pension institution governed by public law. Such an objective can be achieved also by non‑resident pension institutions governed by public law, benefitting in Sweden from withholding tax. As regard the Swedish Government's argument that only resident public pension institutions can serve the purpose of promoting stability and viability of the Swedish pension scheme, the CJEU noted that the objective of each fund is to protect the stability of their respective national pension scheme and that such a distinguishing criterion would render any cross‑border comparison impossible.

With respect to any possible overriding reason in the public interest to allow the restriction caused by the domestic tax exemption, the Swedish Government argued that the restriction should be justified based on (i) the need to safeguard the objective pursued by Swedish social policy and its financing, and that unnecessarily costly circular flow of public resources can be avoided due to the exemption, as well as (ii) the principle of territoriality combined with the need to preserve a balanced allocation of the power of taxation between the Member States. However, according to EU case law and as stated by the CJEU, administrative disadvantages are not alone sufficient to justify a barrier to the free movement of capital. Further, the CJEU stated that a Member State cannot rely on the need to ensure a balanced allocation of the power of taxation in a situation where the Member State levies tax on an income to non‑resident funds, while it has chosen not to tax resident funds on corresponding domestic income. The rules at hand cannot be considered to have the intention of preventing conduct likely to jeopardise a balanced allocation of the power to tax between the Member States.

As such, the CJEU ruled that the domestic rules under which dividend distributions to non‑resident pension institutions are subject to a withholding tax, whereas dividend distributions to resident pension institutions governed by public law are not, are contrary to EU law.

The Swedish Supreme Administrative Court will now decide the outcome of the domestic cases (case no. 6973–6977‑21, 7550–7558‑21, and 664–669‑22) based on the CJEU’s ruling. Schjødt’s tax lawyers follows the development closely and will report any updates.

Please feel free to get in contact with any of Schjødt’s tax lawyers if you have any further questions or wish to discuss possible withholding tax reclaims based on this recent judgement or otherwise.