On October 17, 2019, the Swedish government published an official report proposing a new regulation on postponement of payments of withholding tax charged on dividend distributions to loss-making foreign (i.e. non-Swedish) entities. The proposal has been enacted and the new legislation entered into force on January 1, 2020.
Basis for the Swedish legislation – CJEU Case C-575/17 Sofina SA and Others
The new legislation is based on the Court of Justice of the European Union (CJEU) judgment in case C-575/17 Sofina SA and Others. The case concerned the compatibility with EU law of the French withholding tax levied on dividends paid by French companies to non-resident, loss-making companies. The case involved Sofina SA, Rebelco SA and Sidro SA, which were three Belgian companies that received French-sourced dividend distributions. The distributions were subject to a 15% withholding tax in accordance with the tax treaty between France and Belgium. The three Belgian companies were loss-making and the withholding tax charged resulted in a non-recoverable expense for the Belgian companies. In contrast, loss-making French companies are only taxed on the amount of the dividend distributions they receive once the companies become profitable again. The Belgian companies claimed that the less favorable tax treatment infringed EU law and requested a refund of the tax charged. The CJEU noted that the French legislation treats the dividends distributed to a non-resident, loss-making company less favorably compared to loss-making French companies, thus creating a cash flow disadvantage for non-resident, loss-making companies. Referring to its previous case law, the CJEU concluded that the difference in tax treatment constituted a restriction on the free movement of capital and an unjustified breach of EU law.
Swedish withholding tax legislation prior to 2020
Sweden had a withholding tax system for companies that was similar to the French rules. Swedish companies could, and still can, offset the dividend received against costs incurred during the year and against deficits from previous years, which means that the effective taxation of the dividend is postponed until the company makes a profit. There is no comparable provision in Swedish legislation that grants a postponement of the withholding tax charged on dividends paid to companies resident in another state. As such, loss-making, non-resident companies would have a cash flow disadvantage compared to Swedish companies in a similar situation.
Against this background, the Swedish legislation, just like the French legislation, risked constituting a restriction on the free movement of capital. The Swedish government further considered that there are no special circumstances in the Swedish legislation that could lead to this restriction being justifiable under EU law. For that reason, the Swedish government concluded that there were reasons to change the Swedish regulation to be compatible with EU law.
New rules on postponement of withholding tax payments
According to the new rules, it is clear that a loss-making foreign entity may be granted a postponement of payment of withholding tax for certain dividends, if the foreign entity, since the time of distribution, is a resident of:
- a Member State of the EU;
- a state within the European Economic Area which has entered into a special agreement with Sweden or the EU on mutual assistance for the recovery of tax claims; or
- a state which has entered into a tax treaty with Sweden containing articles on exchange of information and assistance with the collection of tax claims.
Further, in order to be granted a postponement, the taxpayer must be able to prove that the tax has been withheld or paid for the relevant dividend and that there is a so-called postponement space (Swe. anståndsutrymme). When calculating whether there is a postponement space, the foreign entity's earnings, dividends received by the company during the fiscal year in question and previously granted deferred income shall be taken into account.
The postponement may be granted for up to four months after the end of the fiscal year that follows the fiscal year when a dividend was paid. If the postponement is granted for a dividend for which taxes have already been paid, then the Swedish Tax Agency shall repay such withholding taxes to the foreign entity being granted the postponement.
When the postponement period expires or is terminated, the Swedish Tax Agency will send a payment notice about the withholding tax that is to be paid.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.