SkatteNytt nr 1-2 2007 s. 36

The ECJ’s Case Law on Direct Taxation in Swedish Tax Courts

On 21 and 22 June 2006, the Department of Business Law, School of Economics and Management, Lund University, hosted twelve speakers from several Member States of the EU and the EEA to present the results of an empirical study of the impact of the ECJ’s case law in the field of direct tax law, mostly directed towards domestic tax courts. The Department of Business law, Stiftelsen TOR/Skattenytt and Wenner Gren Stiftelser financed this conference and this article reports partly the analysis of the ECJ’s case law’s effects in Sweden since 1995.

After several months’ preparations, 10 member States’ reporters came to deliver a speech and a report for the meeting held in Lund. Kristiina Aïima (Finland), Cécile Brokelind (Sweden) Andreas Bullen (Norway), Søren Friis Hansen (Denmark), Axel Cordewener (Germany), Dennis Weber and Otto Marres (The Netherlands), Georg Kofler (Austria), Pasquale Pistone (Italy), Ana Paula Dourado (Portugal) and Georgios Matsos (Greece) presented their findings in a brief speech for Swedish (mainly but not only) academics, practitioners, judges and representatives of the tax administration. The Marks and Spencer (C-446/03), the then-pending Cadbury-Schweppes (C-196/04), the pending Esab (C-231/05) and D (C-376/03)-cases’ impact on Member States tax laws was also intensively discussed in smaller groups in a comparative approach.

Furthermore Kerstin Malmer (head of DG Taxation and Customs Union, Direct Taxation), and Maria Elena Scoppio, (Cabinet of Commissioner Kovács, Legal Adviser, Taxation and Customs Union) from the EU commission also contributed a presentation on the monitoring of the application of the ECJ rulings and EC law in general. Prof. em. Leif Mutén held the opening speech with a general reflection on the ECJ’s role for the EU in the field of direct taxation.

The main goal of this meeting was to initiate a reflection about the ECJ’s actual role in the uniform application of EC law in the field of direct taxation within each Member State. The method used in order to reach this goal was to invite each national reporter to present a historical and prospective analysis of this impact with support of a questionnaire.

To put it in a nutshell, Member States approach to the ECJ’s case law varies considerably, even though a growing awareness on behalf of courts and tax lawmakers could be noticed in almost all States represented at the conference. Yet, as the ECJ’s rulings are not consistently producing their anticipated effects on Member States’ tax laws, the uniform application of Community law within EU member states is uncertain. The vast diversity of member States’ tax law and constitutional traditions may also contribute to this result, unsurprisingly.

The subsequent developments focus shortly on how Swedish judges have (or have not) reacted to the expansion of the fundamental freedoms in the field of direct taxation. They include an overview of domestic cases reaching (or not) the Supreme Administrative Court’s level where a reference to the ECJ on the basis of article 234 § 3 was not carried out. In other words, this article provides for a collection of cases that may not contribute to a uniform application of EC law.

See Kristina Ståhl ”Skatterna och den fria rörligheten inom EU – Svensk skatterätt i förändring?” SIEPS 2006:8 for a complete picture.

The starting point this report is to review whether and if so how Swedish courts tackle the assessment of internal tax law in the light of the Fundamental Freedoms in the corporate and individual income tax areas. The question of assessing legislative and administrative practice is left aside, although it might be relevant to reveal a complete picture of Sweden’s reactions to Community law1.

Finding Empirical Data

Gathering empirical data about the effects of the ECJ rulings in direct tax cases on the Swedish tax judges requires determination and luck. Determination, as there is no common database or exhaustive publications for all courts’ decisions rendered in tax cases. At the first level of proceedings (lower tax courts, county Administrative courts, see below) there is no systematic organization of the rulings. Furthermore, an additional follow up will be necessary in the next few years for several central pending issues such as cross-border tax consolidation that might reach Swedish tax courts.

The material presented here mainly deals with domestic cases handed down during the very first years of Sweden’s accession to the EU. The cases referred to the ECJ for preliminary ruling by the Supreme Administrative Court before 2000 in the field of direct taxation are not analysed in this report since they are adequately reported elsewhere. The report concentrates on income tax cases involving arguments of EC law. As a tax case may take more than five years to reach the Supreme Administrative Court2, and as Sweden joined the EU in 1995, the first cases dealing with EC law did not appear in the Supreme Administrative Court until the start of the new millennium3. Our research has therefore focused on the years 2000 and onwards.

Unless it arises from the Swedish Board for Advance Rulings, where the case may take less time to reach the Supreme administrative Court.

With the exception of two cases ending at the ECJ C-118/96 Jessica Safir (28-4-96) and C-200/98 X AB and Y AB (18-11-99).

Eleven years of membership in the EU

As far as Sweden is concerned, it is fair to describe the status of implementation of EC law as generally acceptable, considering the low number of direct enforcement actions against Sweden (art. 226 EC)4. Regarding direct taxes, several extensive studies carried out by the Finance Ministry show the legislator’s care for assessing the needs of amendments in internal law.5 The level of awareness is therefore quite high, although sometime seems to elapse unnecessarily between the discovery of an infringement to EC law and the change of the tax rule challenged either in court or at the ECJ.6

Sweden’s strict dualist system does not contribute, however, to an automatic acceptance of the EC rule as superior to Swedish law. As a result, and especially in direct tax law, the legislator has introduced in Sweden’s rule of law a ”Swedish EC law” that is difficult to reconcile with Sweden’s traditional legal interpretation. Generally speaking, Swedish judges tend to give priority to the interpretation of domestic law with reference to preparatory works (the law’s intent). Additionally, some critics may be addressed towards the ”leave to appeal”7 procedure. As the Supreme Administrative Court has allowed very few reviews8 based on the need to amend or develop domestic case law because of the application of EC law, with a view to refer the case to the ECJ on the basis of article 234 EC.

From 1995 to 2004, 143 direct enforcement actions were initiated against Sweden in all areas dealt with by EU law. Only Denmark and Luxembourg have lower figures. For complete statistics, see the Commission’s general secretariat’s home page on monitoring the application of EC law in member States: http://ec.europa.eu/community_law/eulaw/pdf/XXII_rapport_annuel/22_rapport_annuel_en.htm

See for instance SOU 2002:47 of May 2002 gathering expert reports on how the EU influences (or should) influence the Swedish tax system within the next coming decade. See also SOU 2005:99 a report of 30 November 2005 on company taxation where some issues of compatibility with EC law yet unsolved are analyzed. In an earlier study (Ds 2000:28) some direct tax law measures were identified and later proposed to the Riksdag (parliament) (Proposition 2000/01:22) to comply with EC law (mainly PE of EU companies).

Some doctrinal opinions have, however, been raised in an opposite direction, claiming that the legislative power has abdicated in favour of the tax authorities, taking the role of a Constitutional Court. Påhlsson ”Skatteverkets styrsignaler – en ny blomma i regelrabatten”, Skattenytt 7-8 2006.

(Prövningstillstånd ”PT 35 § and 36 § of the Administrative procedural law ”Förvaltningsprocesslagen” (1971:291).

The Swedish Supreme courts referred in total 12 cases for preliminary rulings in 11 years of membership. Out of these, 6 ECJ cases raised on the initiative of administrative Swedish courts dealing with income tax, only 4 arose from the Supreme administrative court. In X-AB & Y-AB (C-200/99) and X and Y (C-436/00), and Skandia (C- 422/01) the cases were initially dealt with by the Swedish Board for Advance Rulings whose decisions were appealed against and brought to the Supreme administrative court who referred the issue to the ECJ. In Wallentin (C-169/03) the case arose from the traditional procedure. The two other cases were initiated by one administrative court (Safir, C-118/96), and one court of appeals of Northern Sweden (Bouanich C-265/04). Two cases arising from the Swedish Board for Advance Rulings are pending at the Supreme administrative court and were referred in 2005 to the ECJ (C-102/05 and 101/05) on art. 56 EC. A few more cases are to be expected inter alia on CFC rules.

Too few cases referred to the ECJ?

On 18 October 2004, the Commission of the European Union delivered a reasoned opinion9 to Sweden regarding a breach of Art. 234(3) EC. Art. 234(3) of the EC Treaty imposes a duty on the national courts or tribunals of last instance to request a preliminary ruling from the ECJ when a question of the interpretation of Community law is raised during legal proceedings. It seems that a number of rulings that should have been requested may have been ”filtered out” by the Swedish procedural rules, such as the ”leave to appeal” procedure, as only 12 cases had been referred to the ECJ by the two Swedish Supreme Courts (Administrative and Civil) in the first seven years of Sweden’s membership of the European Union.10 In addition to the low number of cases raised in last instance, the Commission criticized the Swedish procedural rules for not requiring a motivation for the refusal of leave to appeal. In other words, taxpayers whose requests for leave to appeal have been refused have no means to check the reasons of this refusal.

After many discussions, and as a response to this legal action, the Swedish government issued a proposal (Ds 2005:2511) in order to remedy this problem introducing a duty on the courts of last resort to motivate their decisions whether or not to refer the issue to the ECJ. This requirement applies only to the extent that one of the parties to the trial has submitted a question of EC law fulfilling the conditions laid in article 234(3).

A closer look to the number of preliminary rulings in direct tax cases show, however, that Sweden has initiated more preliminary rulings (8) than other Member States except for Germany (29), the Netherlands (17), Belgium (8) and the UK (12). It seems therefore that even thought the Supreme administrative court may be criticized for rejecting leave to appeal too often, it might not mean that too few cases reach the ECJ, as even lower courts are referring actively (at least compared to other member States).

It would not be fair to set aside the Board for Advance Rulings’ practice, as they are not considered as a ”court” in the meaning of article 234 EC. Indeed, this practice deals with many cases involving Community legislation, and shows a large awareness of current issues ranging from group contributions to personal options, decisions rendered in the light of Marks & Spencer (C-446/03) and de Lasteyrie du Saillant (C-9/02) cases. Further, most of the Supreme administrative court’s decisions arise from challenged Board’s decisions, and grant taxpayer Community rights indisputably. So a ”small” number of references to the ECJ might not automatically lead to less efficient protection of taxpayers’ rights.

Under Art. 226 EC.

Para. 8 of the Commission’s reasoned opinion, C (2004)3899.

See Prop 2005/06:157, 16 March 2006. Entry into force 1 July 2006.

A peculiar way to understand the ECJ case law?

In the field of direct tax law especially, the domestic courts tend to read ECJ cases in a peculiar way. It is fair to state that arguments based on EC law and raised in Court (all levels of jurisdiction) do not receive the same enthusiasm on behalf of all courts.

For instance, we have noticed some county courts cases where the judges did actually base their decisions on AG’s opinions in pending cases at ECJ. For instance, in the Lindex case on cross border group contributions, the Vänersborg county court12 ruled in favour of the taxpayer. The court condemned the Swedish tax law provision refusing deduction for group contribution sent to Germany, with support of the Opinion of AG Poiares Maduro in the Marks and Spencer case (C-446-03). Even more noteworthy, the court did not consider referring the case to the ECJ for a preliminary ruling although a rather similar issue was initiated in Finland (same group contribution regime) and sent to Luxembourg a couple of days earlier13. It may be submitted that this enthusiastic application of the AG’s opinions in the Marks and Spencer case may lead to a disparate application of EC law within the EU, as we still don’t know how the ECJ will decide in respect of the compatibility of Finnish group contributions with EC law14. Furthermore, two decisions15 of 29 September 2006 from the Board for Advance Rulings (both challenged by the Tax Authorities) calling for a review from the Supreme administrative view will soon enough provide for a new interpretation of the ECJ case law from a Swedish perspective.

Another peculiar situation arose in two conflicting Stockholm county court decisions handed down on the same day (4 July 200216) by the same judge in two cases dealing with the same tax provision on the roll over capital gains tax in case of share exchanges17 involving shares in Swedish/ EU companies. the rule was introduced in 1998 as an extension of the merger directive’s provisions available for cross-border groups of companies with respect to domestic exchanges. When resident taxpayers emigrate and subsequently exchange their shares for some other company’s shares, they are not allowed to roll over the capital gains tax on the exchange. In the first of the two cases above mentioned, the taxpayer had moved with his family to the UK because of his employment. The exchange of shares occurred while he was in the UK, triggering a capital gain of 1,6 million Ä. In the other case, the taxpayer moved to Belgium (it is not clear from the case what the reason of this move was) and after that exchanged her Swedish shares triggering a capital gain of 1 000 Ä. In both cases, the Swedish tax authorities taxed the gains and refused the roll over, as both taxpayers were non-residents at the time of share exchange. The first taxpayer (supported by a lawyer) won his case arguing that this tax provision was incompatible with article 39 EC, and the tax authorities appealed against the court’s decision. He won in the appeal Court as well18. The second taxpayer (not supported by an attorney) lost her case, as she could not prove that her treaty freedoms were infringed lacking cross-border economic activity (the judges referred to the Werner case). It may be argued, though, that the judge should have used article 18 EC19 as the facts arose after the signature of the Amsterdam Treaty extending the fundamental freedom to not exclusively economic activities. She won at appeal Court20. The comparison of the cases is interesting, as the county Court ignored the de Lasteyrie case, then pending; the AG’s opinion had been published one month earlier, and it is fair to say that the judge should have been aware that the issue was ”unclear”, and could have waited to deliver the decision unfavourable to the taxpayer, or even sent to the ECJ a request for a preliminary ruling on the application of article 18 EC to exit taxes.

30 May 2005, see Brokelind ”Group Taxation and CFC Rules in Swedish Tax Cases” TNI 18 July 2005.

24 May 2005, Oy Esab, C-231/05

At the time of printing though, the AG J. Kokott in the Oy/Esab case C-231/05 had opined on 12 September 2006 for a justification ground based on Mark’s and Spencers’ ruling, whereby only contributions subject to Finnish tax liability are deductible (in the direction subsidiary to parent-company).

See the two decisions of the Board for Advance Rulings of 29 September 2006 (Skatteverket hemsidan, Sammanställning av rättsfall 28/6) allowing a Swedish parent company of a Dutch subsidiary in liquidation deduction of a group contribution, and refusing a Swedish subsidiary the right to deduct a group contribution in favor of a Finnish parent company.

Case nr 21758-01 H. Mogren and case nr 10410-02, M. Söderberg.

Law 1998:1601 on deferral of capital gains tax for share exchanges, later on referred to in 48a kap. IL.

Case nr 5189-03 16 May 2005.

Ex article 8a (1) now article 18EC on the right of every Union citizen to move and reside freely within all member States. See for instance James D. Mather ”The Court of Justice and the Union Citizen” in European Law Review Nov. 2005, pp. 722 ff. Applied to income tax, article 18 EC seems to provide sufficient protection, see AG Philippe Léger’s opinion on Turpeinen, C-520/04 on 18 May 2006 confirmed on 9 November 2006 by the ECT.

Case nr 5141-03 16 May 2005.

The Acte Clair doctrine and the Swedish Tax Courts

It seems fair to state that the Swedish Supreme Courts interpret the limitations to the obligation for a Supreme Court to refer under article 234(3) arising from the CILFIT case (283/81) liberally. There are various examples in case law borrowed from the VAT area showing that the Swedish Supreme judge is not much concerned with the risk of divergence in judicial decisions within the Community, even though harmonization is much better achieved in this field21. The same could be stated for direct tax cases.

For instance on 22 September 200422, the Supreme Administrative Court refused leave to appeal in a case dealing with the Parent-Subsidiary directive 90/435/EEC. The Court refused to stay proceedings and request a preliminary ruling in the case, although the taxpayer clearly demonstrated that the question was relevant, that it had not been already dealt with in earlier case law, and that the correct interpretation of EC law was not obvious and left room for doubt23 (none of the ”acte clair” / CILFIT criteria was fulfilled). Basically, the issue was to know whether the notion of profit distribution (instead of dividends) provided for in article 4 covered interest paid on profit-participating loans. In this case, the source State did not admit deduction of such financial charges (on the ground of internal law subsequently condemned in the Bosal case nr C-168/01) and the residence State (Sweden) qualified the payments received as interest and taxed the beneficiary once again, which resulted in double taxation of the profits in question. The Parent-Subsidiary Directive (see preamble 4[th] indent) clearly covers this kind of double taxation linked to different treatments of the same transaction in two tax jurisdictions.

One of the major issues raised in this case was the need to obtain a decision from the ECJ on the direct effect of article 4 in the directive preventing double economic taxation of qualifying profit distributions. The lower courts ignored the parent/subsidiary directive as not directly applicable, and did not see the need to refer under 234(1). In other words, they declared the directive to be ”inapplicable”. The Supreme Administrative Court refusing the leave to appeal (and whose decision did not have to be motivated) stated that it is highly doubtful that the concept of ”profit distributions” covers payments, such as those in the case in question, and that the directive was of lesser importance as compared to the bilateral tax treaty in question, empowering Sweden with the right to tax these payments. The Swedish taxpayer applied for a revision (resning) of the decision in early 2005 for mistaken application of EC law: although national judges may apply the provisions of a directive without the permission of the ECJ, they are, nevertheless, not empowered to declare that a directive does not apply or does not have direct effect. The outcome of this case is unknown yet.

See Oskar Henkow, an article on input VAT on financial transactions within groups of companies ”Föreligger avdragsrätt för ingående mervärdeskatt på förvärv för försäljning av aktier i dotter-bolag?”, SvSkT 4/2004, pp. 217-230.

See C. Brokelind ”Swedish Supreme Administrative Court Rejects Reference to ECJ Regarding Application of the EC Parent-Subsidiary Directive”, ET 45 2005/8, pp. 232-331

The county administrative court of Malmö even recognized that ”it is rather doubtful that the directive has direct effect and if it does not have such direct effect, there is no conflict between EC law and Swedish law”.

A sample of areas tackled by Swedish tax courts

Due to the dual income tax system (and the higher tax rate for labour income), the Swedish tax court cases involving Community law are to a large extent dealing with individual income taxes although corporate tax issues are tackled more often by the Board for Advance Rulings, and might not end in court. Therefore, the following paragraphs are not meant to provide for an exhaustive investigation.

1. Individual Income Tax and Exit Taxation

Both capital gains deferral on shares and on the sale of permanent housing24 have generated a number of domestic cases even before the issue was settled by the ECJ in the C-9/02 de Lasteyrie case.

Regarding capital gains on the sale of permanent housing, the starting point is a case of Court of appeals of Gothenburg dated 29 October 2001, refusing to grant roll-over of capital gain tax arising for the sale of property in Sweden (exit to Denmark, 47:3 IL). The internal law provision requires that both the owner-occupied property sold and the replacement property be located in Sweden for the tax to be deferred. The Malmö county Court had declared (23 May 2000) the provision compatible with article 58.1 EC, and on appeal, the Court of appeal in Gothenburg referring to ECJ cases Wielockx (C-80/94), Asscher (C-107/94), Verkooijen (C-35/98), Baars (C-251/98) in conjunction with the Bachmann case (C-204/90) found the provision justified. According to the decision, the purpose of this law is to protect against erosion of the tax base, in a proportionate fashion. The Supreme Administrative Court did not grant any leave to appeal to that case, and until now, the law stands still25. Nevertheless, the Commission brought an action in enforcement against Sweden to the ECJ (case C-104/0626) on the grounds of articles 18, 39, 43, 56 EC and 28, 31, 40 EEA. The Swedish Government expressed on 11 May 2006 its intention to amend the law, and adapt to EC law, after a refusal to adjust its position after the first reasoned opinion issued in July 2005. A couple of cases are still pending in Sweden about this question. In a pending case at the Stockholm county Court (Sandford) the taxpayer suggested to the county Court to refer the issue to the ECJ, and the Court has not reached any decision yet27. Yet, some legislative changes are under current discussions28, extending the roll-over to acquisition of non-Swedish property, which should put an end to judicial activity in this respect.

The roll-over of capital gains tax on exchange of shares29 raised by far the largest number of European law cases in Swedish courts. The challenged internal law provision is an extension of the Merger Directive’s roll-over of capital gains tax arising on the exchange of shares in the shareholder’s hands after a merger between two EU companies for instance. For individuals, Swedish law provides the same tax relief as in the Merger Directive provided they are resident of Sweden. As soon as taxpayers leave Sweden, the roll-over is not applicable any more and capital gains tax is due on the value of the exchange of shares granted earlier. The first case dealing with the incompatibility of this rule with the EC fundamental freedoms arose on 30 September 200330. In this case, a taxpayer holding shares in Astra AB had moved to the UK for reasons connected with his employment at the moment when Astra AB was merged into Astra Zeneca Plc. The exchange of shares gave rise to a capital gain of 1 600 ÄÄ for which he applied for roll-over in his tax return (2000). This was refused by the tax authorities applying the law. The county Court of Stockholm allowed for deferral on the grounds of article 39EC. The tax authorities did not lodge any appeal. The courts’ positions are, however, divided. The deferral of tax was granted subsequently on several occasions by different county courts and courts of appeals31, and in some other cases, refused32 as Swedish provision was justified for reasons of tax coherence as stated in the Bachmann case, C-204/90. None of these cases has reached the Supreme Administrative court, and not one single court referred the issue to the ECJ, although taxpayers in their claims showed the need to obtain clarification.

On 10 April 200533, the tax authorities expressed some doubts in an official standpoint as to the compatibility of these rules with the fundamental freedoms, which normally should allow taxpayers their right to tax deferral and no additional processes should occur on this issue.

Although no case seems to have reached the Swedish tax courts on this topic yet, it is submitted in doctrine and by the tax authorities that the general exit taxation of non-residents for shares held in Swedish companies within the last ten years after expatriation may be incompatible with EC law34. Indeed, even though Sweden negotiates in bilateral tax treaties a less stringent exit rule their compatibility with the fundamental freedoms arising from the ECJ’s reasoning in de Lasteyrie C-9/02 is more than questionable. Therefore the tax authorities extended the above-mentioned roll-over for exchange of shares to these taxpayers falling under the general exit rule35.

The taxation of stock options for departing taxpayers has given rise to an interesting case reaching the Supreme Administrative Court in 2004 but not referred to the ECJ36. The right for an employee to purchase shares in the future at a fixed (and by hypothesis advantageous) price is as a rule and according to Swedish tax rule taxed at the moment of its exercise37, as a fringe benefit in the category of employment income (approx. 57 % tax), on the difference between the market value of the share purchased and the exercise price (if beneficial). However, should the taxpayer leave Sweden after the option has been vested and before exercising the option, he would be taxed at this moment on the value of the option as if it were exercised. This kind of exit taxation should fall under article 39EC and be disregarded by domestic judges as the de Lasteyrie case C-09/02 suggests. In the above mentioned case, the Board for Advance Rulings was requested by a taxpayer to determine whether and if so how he would be taxed for his options, when moving to the UK. He required specifically the Board not to take position on the compatibility of exit taxes with EC law (probably to avoid a preliminary ruling at ECJ that takes two more years). The Board therefore provided a ruling on the basis of the exit provision, and on appeal, the Supreme Administrative Court contested the Board’s decision, as it should have applied EC law and refused to leave a ruling on the question. It seems therefore quite clear that the Supreme Administrative Court applies the de Lasteyrie case and suggests that this exit tax provision is not in compliance with the fundamental freedoms.

What is not clear is the conclusion for the taxpayer, as the law stands still and as he obtained no permission to exit without being taxed on his vested options. On 14 October 2005, however, the tax authorities recognized in a statement the incompatibility meaning that they will not require capital gains taxation on exit any more. All practical questions relating to the application of bilateral tax treaties and further capital gains taxes due on the sale of shares acquired abroad by taxpayers are not solved yet though38.

The provisions in the income tax law referred to here are 10 kap. 11 § IL (personal stock options), 47 kap. IL (capital gains deferral on permanent housing), 48 a kap. §11 and 49 kap.IL (exchange of shares), 3 kap. 19 § IL ”10 years rule” and 53 kap. IL on transfer of shares at acquisition cost between related parties.

The tax authorities stated on 16 December 2004 (Dnr 130 701154-04/111) that the provision was justified on the grounds of tax coherence, and on 24 February 2005 (Dnr 103 103669/05) acknowledged the discriminatory effects of the provision only to the extent that the replacement housing was in Sweden (i.e. not the exit but the inbound situation of a Swede coming back home).

See also the direct enforcement against Portugal on the same issue, C-345/05.

See also a Jönköping county court’s decision nr 3735-04

See prop. 2006/07:19

48 a kap. 11 §, earlier law1998:1601, art 1 to 5.

Case nr 14660-02, Stockholm county court, Önfelt.

See for instance Case 28 May 2003, court of appeals of Stockholm 4120-03, S. Littorin where the interpretation of internal law provision was grounded on the Merger Directive’sarticle 8.1; see also case of 16 May 2005 court of appeals of Stockholm 7451-03 Carlzon, on the basis of de Lasteyrie C-9/02; see case of Uppsala county court nr 1287/04 of 22 November 2004, B. Elenius also on the grounds of C-9/02; see court of appeals of Stockholm nr 6879-03 of 16 May 2005, v. Lerenius, on C-9/02.

See especially the G. Lerenius case nr 3922-03, county court case of 30 Sept 2003, appealed at Stockholm’s court of appeals, case rendered on 16 May 2005 nr 6997-03. See also case nr 1392-05 of 20 September 2005 Stockholm’s court of appeals, Bergendal, in which case the taxpayer exited to the US, and did not argue on the basis of 58EC, but on the Merger’s directive. Some later case (8 February 2006, 2343-05, Oppenheimer, exit to US) of Stockholm’s court of appeals came to the same conclusion.

Dnr 131 532464-05/111.

3 kap. 19 § IL requires taxation in Sweden of capital gains on Swedish shares for non-residents who under the last 10 years had a close connection with Sweden.

See L. Mutén ”EG-Domstolen och exitsskatten” Skattenytt nr 5 2004.

RÅ 2004 not 135 & RÅ 2004 ref. 35, for a comment see K. Ståhl ”EG-rätten i den svenska förhandsbeskeds processen” festskrift till Nils Mattsson, 2005, pp. 431-443.

10 kap. 11 § IL, ”personaloptioner”, employees’stock option plans, see domestic case law RÅ 2004 ref. 35 for instance.

See Lindberg, Lillon & Horvath, Alexander ”Exitsskatten på personaloptioner strider mot EG-Fördraget – exempel på praktiska problem vid tillämpning” SkatteNytt nr 4, 2006.

2. Individual income tax cases on deductions for expenses incurred in the EU and insurance premiums

We found a couple of interesting and contradictory cases dealing with the right to deduct insurance premiums. For instance, in a case of 18 October 200439 case, the Supreme Administrative Court granted a leave to appeal in a case on the grounds of EC law (art. 39 EC) without referring to the ECJ (quite unique). The issue was indeed straightforward and led to legislative amendment in the subsequent years40. In this case, a Swedish tax resident working in Denmark was refused on the grounds of internal Swedish law41 a deduction for contributions paid to a Danish unemployment insurance. Whereas the county Court and the appeals Court refused to apply EC law, the Supreme Administrative Court allowed the deduction on 18 October 2004, applying the ECJ’s finding in de Groot (C-385/00).

In another case of 15 June 200442, the Supreme Administrative Court had also applied EC law in a case where a Swedish resident was refused to include in his reference income used for the assessment of unemployment insurance his taxable income from a Norwegian source. The law referred to Swedish taxable income only, which was easy for the Supreme Administrative Court to declare in breach with the fundamental freedoms of the EC and EEA treaties.

Regarding taxation of insurance proceeds and deduction of insurance premiums, two Supreme Administrative Court cases have come to our attention. In a case of 7 September 200443 for instance, a Swedish tax resident subscribed to a private insurance company in the UK for retirement coverage. She asked to the Swedish Board for Advance Rulings the extent of her liability to tax on proceeds and net wealth. Among other questions, she needed to know whether this kind of private pension expenses would be deductible for income tax purposes (IL kap. 58, 59).

The Supreme Administrative Court concurred with the analysis of the Swedish Board for Advance Rulings with respect to the taxpayer’s situation, and applied the coherence justification from the Bachmann case, while disregarding the Danner case in this situation: the distinct treatment of payments to foreign insurance companies is clearly needed for the sake of internal coherence. This reasoning even found support in the doctrine44. The outcome in the C-150/04 case against Denmark should, however, change this view, especially if ECJ follows the AG’s opinion (1 June 2006).

The Swedish position in this case is close to the Danish. Firstly, Sweden stood on the same side and supported Denmark in this direct enforcement action as the same issue arises due to Swedish tax rules. Secondly, and as stated in § 59 of the AG’s opinion in C-150/04, Sweden still defends and applies the coherence justification arising from the Bachmann case, according to which tax deduction may be granted only to the extent that the capital reversed later on does not escape taxation. By contrast, the AG’s opinion seems to require member States to find more proportionate protection against erosion of tax bases than a systematic refusal of deduction just because there might be a risk that the taxpayer will move to another member State with which a bilateral treaty does not allow Sweden to tax at source.

It is hardly conceivable that the Swedish lawmaker will consequently extend the deduction right to all kinds of insurance premiums (ie Swedish or not) due to the large financial implications (600 billion SEK, 54 billion euros total value of private pension insurances of Swedish source as estimated by the authorities45). A solution would be a review of bilateral tax treaties and giving up article 18 of the OECD model treaty and a coordinated taxation within the EU.

Several cases (see two cases of the Supreme Administrative Court of 14 February 200546 or of 17 September 200447, and of Court of appeals of Stockholm on 10 October 2005 (where EC law arguments where dismissed), deal with the yield tax on pension funds, that arguably should be reduced by the amount of withholding tax levied on outgoing dividends (30 % reduced by tax treaties) when the foreign insurance company invests in Swedish shares. The cases lead to different conclusions that may not ensure a legally secured position for taxpayers who intend to invest in foreign insurance companies.

RÅ 2004 ref. 86.

As from 1-1-2005 the fees paid to unemployment funds are taken into consideration as a tax reduction. 65:11b § IL. In such way, the difficulty of allowing deduction only for expenses linked to the acquisition of taxable income in Sweden is avoided.

Only fees paid ”recognized (Swedish) institutions” were deductible according to 33 § 6 KL.

RÅ 2004 ref. 53.

RÅ 2004 ref. 84

Ulf Rehnberg ”Varför skulle de svenska pensionsförsäkringarna vara oförenliga med EG-fördraget?”;”Why would Swedish retirement insurances be incompatible with EC law?” SkatteNytt nr 11 2005.

According to Ulf Rehnberg (Finance Ministry) in his previously mentioned article.

RÅ 2005 not 7

RÅ 2004 ref. 84

3. Individual income tax, closely held companies

As explained earlier, closely held companies are quite numerous in Sweden as incorporating a single-partner’s company is inexpensive and easy. The Swedish tax law is nevertheless showing endless imagination to limit the use of such companies for tax purposes only48. As soon as 2000, several cases reached the Supreme Administrative court49, arising from the Swedish Board for Advance Rulings, questioning the validity of these rules when part of the activity is carried out in another member State (Denmark in one case). Indeed, part of the dividends arising from closely held companies was taxed in the shareholder’s hands at a favourable 30 % tax rate (now 20 %) within the limit of a percentage of the total amount of wages paid during the tax year of reference, and above a specific threshold. One of the questions directed to the Swedish Board for Advance Rulings in one of the cases was to know whether internal law was compatible with free movement of capital as it allowed only Swedish source wages in the computation of this threshold50. The Board recognized the restriction but found it justified on the basis of article 73b of the Rome treaty (then applicable). The Supreme Administrative Court cancelled the ruling, stating that internal law was in clear breach with 43 EC, referring to the ECJ’s case law.

In the other case, a Swedish tax resident owned shares in a Finnish closely held company distributing annual dividends, and the question was to know whether the wages paid in Finland by this Finnish company could increase the amount of the favorable capital gains taxation of dividends. Whereas the Swedish Board for Advance Rulings also found the provision restricting the free movement of capital but justified, the Supreme Administrative Court applied the Verkoojien case’s reasoning and declared the internal law provision incompatible with 56 EC and not justified.

In both cases, the Supreme Administrative Court applied the EC treaty without referring to the ECJ as the breach was clearly established and left no place to any doubt.

In another case of 4 May 200551, the Supreme Administrative Court ex officio and arguably declared article 56EC not to be applicable for allowing capital gains taxation of in a case of sale of shares partly held by a Canadian shareholder, and increased the part of the gain taxable at a progressive rate as employment income. This case is interesting as it arose from the traditional judicial path and once again, the EC law arguments are not showing up before the very last words in the court’s decision, as an attempt to create binding case law and prevent subsequent cases on the same issue. Further, it shows that from time to time the Supreme Administrative Court applies EC law arguments ex officio against taxpayers, which is arguable52.

A reform of these rules took place last year, but most comments on previous rules are transferable to the new rules applicable as from 1 January 2006.

RÅ 2000 ref. 47 and RÅ 2000 ref. 38 of 17 August 2000.

43:12-16 IL. See also Lodin, Lindencrona, Melz & Silverberg, Inkomstskatt, en läro- och handbook i skatterätt Studentlitteratur, 10th edition, 2005, p. 373.

RÅ 2005 ref. 21.

Just as tax treaties may not put taxpayers in a worse situation than if there had been no treaty, the same can be stated generally speaking for EC law, at least to the extent it has direct effect.

4. Corporate income tax and Group taxation

Swedish corporate income tax is not as protective as individual income tax and is instead constructed in an ”attractive” tax competitive spirit, which might explain the small amount of cases reaching the courts and arising from cross-border business in that respect.53 Further, several issues are dealt with by the Board for Advance Rulings and remain unchallenged or are not followed up in a process, which explains the reduced number of court cases regarding corporate taxation.

A couple of pending cases on burning issues on CFC54 and group contributions55 have already been adequately reported elsewhere and will not be further discussed here. The outcome of the challenge of protective CFC/group taxation rules with the fundamental freedoms in the ECJ will shape new legislation all over the EU and it seems unnecessary to add more to the sea of literature on the topic.

Regarding group taxation several interesting issues reaching the Court of appeals of Stockholm and Gothenburg in 2005 deserve attention56. According to domestic case law57, internal transactions within groups of companies may not need to follow the arm’s length principle. Interest on loans between interrelated companies may therefore be paid under market value under certain conditions, such as the existence of actual business relations between the companies allowing margin profits to be realized on other transactions than the loan. According to the transfer pricing correction rule (14:19 IL), this rule may not be applied when one of the companies is incorporated abroad (among -others in the EU) as under-market-priced transactions may lead to tax base erosion. After an extensive discussion on the ECJ case law relating to restrictions of free movement of capital, the Stockholm Court of appeals ruled that the transfer pricing correction rule was not restrictive in an 11 November 2005 case, based on the county court’s findings that the Bachmann case (C-204/90) allows protection against erosion of tax bases within the EU. In two previous cases on the same legal questions, a couple of months earlier, none of the parties or of the judges took up the question.

Along the same line of thought, and precisely as for group contributions, subsidies paid within interrelated companies are deductible to the extent that they contribute to taxable income for the beneficiary. When the beneficiary is a company incorporated abroad, the payment is therefore not deductible. In a case of 5 September 2005, the Court of appeals of Gothenburg refused deduction of such a subsidy from a Swedish company to a Danish subsidiary on the ground that the right to deduct group contributions is reserved for inbound payments, and that the lawmaker acknowledged the compatibility of the group contribution system with EC law58.

The issue of group contributions is expected to evolve dramatically during the next few years, firstly due to the ECJ cases law (Marks & Spencer C-446/03 and the pending AA, former Esab C-231/05) and to internal proceedings still pending. On 29 September 2006, the Board for Advance Rulings issued two rulings challenged by the tax authorities before the Supreme Administrative Court, the first one allowing a Swedish parent company to deduct a group contribution sent to its Dutch subsidiary in liquidation (as in Marks & Spencer), and the second one refusing a Swedish subsidiary of a Finnish company the right to deduct a contribution sent to Finland (based on the the territoriality principle arising from Marks & Spencer C-446/03 and Futura C-250/99 cases).

In a case of 6 July 200559, the Court of appeals of Gothenburg reversed the Malmö county court’s ruling that was favourable to the taxpayer on the basis of the fundamental freedoms. The Swedish Yves Rocher incorporated company had a branch in Denmark suffering losses for quite some time. Since the Nordic multilateral tax treaty exempted foreign PE’s (permanent establishment) income in the residence State, the Swedish head office could not offset the Danish losses against Swedish income. The tax treaty was amended in 1999 and changed the exemption method to the credit method for foreign PE. In other words, the losses incurred by the (PE) Danish PE could be offset against the Swedish income as from this date, but not earlier losses. The company maintained that this impossible offset linked to a method change in a tax treaty was a restriction on its right of establishment (art. 43EC) just as in the AMID case, (C-141/99). Had the PE’s losses been incurred in Sweden, then the offset had been possible; According to the company and confirmed by the county court, losses incurred prior to the treaty change should be taken into consideration.

The company lost on appeal and did not ask for a leave to appeal at the Supreme Administrative court. The issue of interaction between tax treaties and right of establishment would have deserved a decision of the Supreme Administrative Court and a preliminary ruling from the ECJ, since the case arose at the same time as the then pending Marks and Spencer case. Now we know more on the conditions for cross-border loss relief within a corporate group that could have helped the Swedish judge to find a different outcome.

These cases show the unfortunate reluctance of lower courts to refer to ECJ. Due to the large number of cases where judges still use the coherence of the tax system to justify discriminatory or restrictive tax provisions, this is regrettable.

It might also be suggested that corporation do not submit claims on Community law as the risks of success are far too low and as criticizing the State for not implementing correctly EC law is never a good advertisement.

A number of advanced rulings (April 2005) recognizing the incompatibility of CFC domestic rules with 43 EC and challenged at Supreme administrative court are pending. See for instance H. Spirén & L-E Wenehed, ”Praktiska konsekvenser av Skatterättsnämndens förhandsbesked avseende CFC reglerna” Skattenytt nr 4 2006, p. 174; C. Brokelind ”Group taxation and CFC rules in Swedish Tax Cases” Tax Notes International, 18-7/2005, pp. 237-241. The Supreme administrative court might deliver a decision to refer to the ECJ soon.

See the Lindex case nr 624-04 och 438-05C 30 May 2005, Vänersborg county court. For a comment, see C. Brokelind ”Suède: l’impact de la jurisprudence communautaire sur le juge de l’impôt direct en matière de fiscalité des groupes de sociétés.” L’année fiscale 2006, PUF; ”Lindex-målet i sitt sammanhang” SvSkT 9/2005 s. 642-647.

24 March 2005, Cylinda nr 7820-03, Gothenburg; 30 May 2005 Palazzini nr 1127-04, Stockholm; 5 September 2005 Förvaltnings AB Anholt, nr 5037-5042-05, Gothenburg; 11 November 2005 Europress nr 5743-04 Stockholm;.

RÅ 1979 1:40 for instance.

The Swedish system was amended in order to allow non-resident companies with a PE in Sweden to receive and send group contributions within Sweden in 2000, 35 kap. 2a IL. Nevertheless, it was never question to allow deduction for group contributions sent to foreign companies that would not be taxable in Sweden.

Nr 288-04.

Conclusion

The purpose of this report was to provide an overview of the inclusion by Swedish judges of the fundamental EC freedoms in their case law. It seems fair to state that so far, the Supreme Administrative Court applies Community law in a favourable way for taxpayers, although the leave to appeal procedure might reduce taxpayers’ chances of access. Nevertheless, Swedish lower courts in general pay relatively little respect to EC law and still refer too much to the Bachmann case to justify the breaches of the fundamental freedoms referred to by taxpayers in their claims60.

The average time that cases are pending at ECJ works as a deterrent for taxpayers in a hurry to ascertain an uneasy tax position, especially when they know that the average delay for internal cases reaching the Supreme Administrative Court is up to 10 years! The best way for the taxpayers to obtain a quick and cheap implementation of their Community rights is to use the advance rulings procedure, where a dynamic approach of EC law is supported, although not systematically. It is hoped that in a close future, attorneys and taxpayers will more often dare to raise Community law arguments in court, as the tax authorities recognize their value already now. After all, Sweden is a relatively new member State and has already coped quite well with the acquis communautaire compared to several other member States (no one mentioned, no one forgotten as a Swedish famous proverb says).

Cécile Brokelind61

Cécile Brokelind, Associate professor, Department of Business Law, School of Economics and Management, University of Lund, Sweden. The author can be contacted at Cecile.Brokelind@busilaw.lu.se.

Although not considered as a ”lower court”, the Swedish Board for Advance Rulings still has a high opinion of the Bachmann ”coherence” defence. See the ruling of 26 November 2006 on exit taxation (IL 22:7; IL 30:8-9) of a company moving its place of management to Malta, Tax News Service 2 November 2006 ”Sweden- Advance Ruling on Swedish exit tax rules and their compatibility with EC law”.

All my gratitude to Jur Kand Marc Kanter who gathered most documentation and case law for this study, and Pr em. Leif Mutén, who edited the document and provided worth full suggestions for improvement. All the reports produced for this conference will be published by the IBFD in 2007. This article is a revised and shorter version than the report to be published by the IBFD.

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