On 21 March 2024, Attorney General (GA) Collins of the Court of Justice of the European Union (CJEU) issued his legal opinion in the CJEU case "KEVA" (Case C‑39/23). The GA opines in favour of the applicants, three Finnish pension institutions.
The KEVA case pertains to the WHT reclaims of three Finnish pension institutions in Sweden on the basis of the fundamental freedom of the free movement of capital under Art. 63 TFEU, specifically concerning WHT levied on Swedish dividend income.
While the Attorney General's opinion is not binding for the CJEU, it is a positive signal for foreign pension institutions aiming to reclaim Swedish WHT. Further, the GA opinion is of significant interest to the investment industry as a whole, as it underlines the importance of material criteria in assessing the comparability of tax legal situations between domestic and foreign taxpayers.
Background
The case revolves around the differential tax treatment of dividends paid by Swedish corporations to foreign public pension institutions vis-à-vis those paid to Sweden's general pension funds (“GP funds”), which are governmental entities, exempt from WHT on such dividends in Sweden. The claimants, two Finnish public pension institutions, who are part of the second pillar of the Finnish pension system (occupational pension) on the other hand are subject to Swedish WHT on dividends.
The Finnish pension institutions claimed before the Swedish national tax courts a refund of WH based on the argument that such unequal treatment violates the free movement of capital (Art. 63 TFEU). After receiving negative decisions in the first two instances, the Swedish Supreme Administrative Court decided to stay the proceedings and to refer the following questions to the CJEU for a preliminary ruling:
- Does the before mentioned differential tax treatment of foreign and domestic pension institutions in Sweden constrain the free movement of capital as delineated in Article 63 TFEU?
- If so, what criteria should be taken into account with regard to the objective comparability of foreign public pension institutions vis-à-vis Swedish GP funds?
- May the potential restriction of the free movement of capital be justified for reasons of public interest in the case at hand?
Key aspects of the GA opinion
The Attorney General opines that the unfavourable tax treatment of the foreign pension institutions indeed constitutes a restriction of the free movement of capital, as it may dissuade investments from non-resident pension schemes in Sweden.
With regard to the comparability of the tax legal situation of the Swedish GP funds on the one hand and the Finnish pension institutions on the other hand, the GA emphasises that this question must be assessed on the basis of material aspects such as the purpose, function, regulatory framework and organizational structure of the pension scheme. Differences of purely technical nature, on the other hand, should not be decisive, so the opinion of the GA.
Based on these arguments, the GA opines that Finnish pension institutions and Swedish GP funds in the case at hand appear to serve analogous public interest objectives, thus potentially qualifying as comparable entities. In this context, the General Attorney deems the defendant's argument, suggesting that foreign public pension funds do not aim to promote the financial stability and durability of the Swedish social security system, and therefore cannot be compared with the GP funds, as unduly restrictive.
In assessing the potential justifications for the restriction of the free movement of capital in the case at hand, the GA finds that administrative efficiency or the prevention of state fiscal losses are inadequate justifications for constraining the free movement of capital in the case at hand.
Conclusion
The comparability of the tax legal situation of foreign and domestic taxpayers with regard to re-strictions of the free movement of capital under national WHT regimes is the central criterion, the application and interpretation of which is shown in two different trends in the case law of national courts:
- A formal interpretation that is closer to the requirement of identity rather than comparability due to excessive formal or technical requirements, making it very difficult for foreign taxpayers to achieve a reduction of foreign WHT.
- A material interpretation that focuses on similarity by comparing the essential characteristics in light of the purpose of the tax exemption, without regard to formal / technical differences.
AG Collins advocates for the second, materialistic approach to the question of comparability, giving less weight to formal/technical aspects. The opinion considers the pension institutions' purpose, function, regulatory framework, and organizational characteristics. The AG thus opposes the tendency apparent in the case law of some national courts, which essentially replaces the direct discrimination against foreign taxpayers with an indirect de facto discrimination through the application of all technical details of national tax regulations. Against the background of the “Effet Utile” provision pursuant to Art. 4 (3) TEU, which requires an EU law-friendly interpretation of national regulations in all cases and which is binding for national courts as well, the current AG opinion is welcomed.
The AG opinion is therefore good news, on the one hand, for the directly affected foreign public pension schemes seeking to recover Swedish WHT, as well as for the international investment industry as a whole.
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