The Supreme Administrative Court in Sweden has granted leave to appeal in transfer pricing case

The Supreme Administrative Court in Sweden has gr...

The Supreme Administrative Court of Sweden will rule in the matter of whether a transfer pricing adjustment can be made when the terms of an agreement are substituted for less favorable, although arm’s length terms.



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The Supreme Administrative Court of Sweden (SAC) has granted leave to appeal in a case concerning two group companies that renegotiated a loan agreement. The loan was entered into in 2003 and was subsequently renegotiated in 2008. Following the renegotiation the terms of the loan (the interest rate) became less favorable for the Swedish entity, although both agreements were considered by the Administrative Court of Appeal to be at arm’s length when looked at in isolation.

In earlier case law concerning similar arrangements, the Gothenburg Administrative Court of Appeal came to the conclusion that only the arm’s length nature of the terms of the latter agreement should be considered.   This conclusion was reached on the grounds that it was the latter agreement that formed the basis for the tax return submitted by the tax payer.

In the case now to be tried by the SCA, the Administrative Court decided in line with earlier case law and consequently ruled that only the latter agreement should be considered in determining the arm’s length nature of the transaction. The Administrative Court of Appeal (ACA), however, departed from the earlier case law stating that the arm’s length nature should be determined by reference to how independent parties would have acted if they had the same contractual relationship as the related parties in the case. The ACA ruled that although the terms and conditions of the renegotiated loan were at arm’s length, an independent party would not have renegotiated the loan and therefore, the renegotiation was not at arm’s length.

This is the first time in 10 years that the SAC has granted leave to appeal in a transfer pricing case.

KPMG observation

The terms and conditions of intra-group agreements have been considered in several recent court cases. The Administrative Court of Appeal ruled in late April 2015 that the relevant time for assessing arm’s length pricing is dependent on the type of agreement at hand, and that there is no support for limiting this arm’s length assessment to the conditions in place at the time of entering into the agreement.

Given the earlier case law and the fact that the legislative history of the Swedish transfer pricing documentation rules presumes that companies have procedures in place to ascertain that pricing in every particular instance is in line with the arm’s length principle.  In light of this historic position, it would be important that the SAC were to issue a clear ruling stating if and under what circumstances agreements should not be continuously updated to reflect arm’s length conditions.

This case may also require the SAC to consider the Swedish doctrine of “beskattningsårets slutenhet” (the defined nature of the tax year). Under this doctrine, only matters that occur during a specific tax year should be considered in respect of a given tax return.  This is particularly relevant from a transfer pricing perspective as an arm’s length price may potentially give the correct result over a number of years but not for a single tax year viewed in isolation.  In this regard the SAC has previously stated that the doctrine may be disregarded in favor of the taxpayer in transfer pricing matters.  The fundamental question would be whether the SAC considers that Swedish Tax Agency may also disregard “beskattningsårets slutenhet” to the tax payer’s disadvantage and therefore adjust the transfer pricing with reference to grounds from previous years that are not a direct part of the tax payer’s income tax return.


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