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Executive summary

On the 29 July 2024, the Court of Justice of the European Union (CJEU) ruled in Keva, et al. v. Skatteverket, C-39/23, that it is contrary to the free movement of capital for Sweden to impose withholding tax on dividends paid to foreign public pension funds, while corresponding dividends received by Swedish public pension funds are deemed tax exempt.

The judgment greatly increases the potential for foreign public pension funds and sovereign wealth funds to claim exemption from Swedish withholding tax. Foreign public pension funds that have paid Swedish withholding tax should assess whether to file a reclaim (i.e., claim for refund).

Facts

Three Finnish public pension funds, all tax resident in Finland, received dividends from Swedish companies for several years. These dividends were subject to Swedish withholding tax. In contrast, dividends from Swedish companies to the Swedish public pension funds, in Swedish "Allmänna pensionsfonderna" (AP Funds), are not subject to withholding tax or any other tax, as the AP Funds benefit from their tax-exempt status as part of the Swedish state.

The Finnish public pension funds claimed a refund of paid withholding tax before the Swedish Tax Agency on the grounds that the liability to withholding tax infringed the free movement of capital as stipulated in Article 63 of the Treaty on the Functioning of the European Union (TFEU). The Swedish Tax Agency rejected the refund claims, asserting that the situation of Swedish and Finnish public pension funds investing in Swedish companies was not objectively comparable.

After pursuing appeals in lower Swedish administrative courts without success, the Finnish public pension funds ultimately appealed to the Swedish Supreme Administrative Court (SAC) which decided to request a preliminary ruling from the CJEU on the matter. The questions referred can be summarized as follows: Does the free movement of capital preclude legislation of a Member State under which dividends distributed by resident companies to nonresident pension institutions governed by public law are subject to withholding tax, whereas dividends distributed to resident pension funds governed by public law are exempt from such a withholding tax?

CJEU's decision

The CJEU concluded that the disparate tax treatment under Swedish domestic tax law, where Swedish public pension funds are treated as tax-exempt and hence not taxed on dividends from Swedish companies, while such dividends to foreign public pension funds are subject to withholding tax, is contrary to the free movement of capital.

In its decision, the CJEU first addressed the disparate treatment, concluding that the situation at hand constitutes a restriction on the free movement of capital because it may hinder foreign public pension funds from investing in Swedish companies. Such a restriction is, however, only contrary to EU law if the restriction applies in objectively comparable situations. Consequently, the CJEU proceeded to examine whether Swedish and Finnish public pension funds were in objectively comparable situations when investing in Sweden.

In accordance with its usual procedure, the CJEU examined this question in light of the purpose of the relevant tax rules. The Swedish government contended that the purpose of the tax exemption for the Swedish state, including the AP Funds, is to prevent a circular flow of public funds and to promote the stability of the Swedish public pension system.

The CJEU stated that despite the Finnish and Swedish public pension funds' not being identical — for instance they have different legal forms and the Finnish pension funds have additional functions — the aim of both the Swedish and Finnish public pension funds is to promote the same social policy objective in a similar way and with the same type of legal and financial organization, as well as a similar general mode of operation. Hence, the CJEU did not consider the differences to have a direct link to the difference in tax treatment.

Because the restriction on the free movement of capital was deemed to concern an objectively comparable situation, the CJEU further examined whether any of the overriding public interests claimed by Sweden could justify the restriction. The CJEU dismissed the claim that the restriction could be justified by a need to safeguard the Swedish social policy objective and its financing, the administrative advantage of avoiding allocation of public resources to the Swedish AP funds in case of taxation and the need to avoid circular flow. The dismissal was based on administrative advantages in themselves not being sufficient justification for the disparity in treatment. The CJEU also dismissed the assertion that the principle of territoriality and the need to preserve a balanced allocation of taxing powers could justify the restriction, on the ground that this cannot apply if a member state has chosen to not tax resident funds.

Implications

The decision from the CJEU is a welcome development for foreign public pension funds receiving dividends from within Sweden. The next step in the particular cases of the Finnish public pension funds is that the SAC should issue its judgments, which will likely align with the CJEU's judgment.

The CJEU's judgment indicates that foreign public pension funds and similar pension institutions with the same public purpose and function may claim an exemption from Swedish withholding tax on dividends. Because the tax exemption enjoyed by the Swedish AP Funds also applies to other parts of the Swedish state, other non-Swedish state/governmental investors are likely also affected by CJEU's judgement. Accordingly, foreign public pension funds and state investors that have paid Swedish withholding tax should assess whether to file a reclaim. Such claims must be filed within five years of the year in which the dividend was paid (i.e., before 31 December 2024 for withholding tax paid in calendar year 2019).

It should be noted that the free movement of capital outlined in Article 63 TFEU generally also covers restrictions between EU Member States and third countries, implying that the CJEU's judgment may be relevant also for public pension fund and state investors outside of the EU.