On September 10, 2015, the Advocate General of the Court of Justice of the European Union (CJEU) gave his opinion in the case of Pensioenfonds Metaal en Techniek v Skatteverket. The AG concluded that Article 63 of the TFEU does not preclude Swedish legislation under which dividends paid by a resident company are subject to withholding tax when paid to a non-resident pension fund, whereas such dividends are subject to a tax calculated on a notional yield, which aims to uniformly tax income from different asset classes, in the hands of a resident pension fund.

In the case of Swedish resident pension funds, a notional yield is calculated on the net assets of the pension fund, and the deemed yield is taxed at 15%. A Dutch resident pension fund by contrast is taxed at a flat rate of 15% of the gross dividend. The stated aim of the Swedish Government is to ensure that the yield tax levied on resident pension funds is neutral from the point of view of the form of investment and relative to economic conditions.

The Swedish Högsta förvaltningsdomstolen referred the question whether the Swedish rules infringed Article 63, concerning the free movement of capital, to the CJEU.

According to the Advocate General, both methods of taxation are in effect a tax on income and a comparison may be made between the different legal bases for taxation of residents and non-residents. The AG considers it fundamental that the objective of the tax system i.e. neutrality from the point of view of investment form and changing economic conditions, must be examined when considering whether the situation for non-resident shareholders is comparable to that for resident shareholders.

The AG referred to the decision of the CJEU in the Truck Centre case, where interest payments gave rise to WHT in the hands of non-residents and CIT when received by resident shareholders. In the Truck Centre case, the Court found that the situations of resident and non-resident shareholders were not objectively comparable. The AG applied the Truck Centre decision and concluded that, in the case in hand, the situation of resident pension funds in Sweden is not comparable to that of non-resident pension funds.

The AG considers that to apply the deemed yield tax to a single form of investment, in this case equities, would not lead to neutrality, but instead to higher taxation unjustly in years of poor economic performance and a tax gift in other years. Furthermore, there would also be a difference in treatment between taxpayers based on the actual performance of stocks in which they invested, whereas the Swedish system ensures neutrality by applying tax to the entire capital invested by pension funds regardless of the composition of specific portfolios. In the view of the AG, the neutrality objectives of the yield tax would not be fulfilled if applied to non-resident shareholders and therefore the situations for residents and non-residents are not comparable.

The Advocate General made additional remarks, should the Court reach the conclusion that the situations of residents and non-residents are comparable, including how the deemed yield tax could be applied to non-resident equity holdings. The AG dismissed the potential justifications for discrimination that were raised by the Swedish government.

It remains to be seen if the Court will agree with how the AG applied the Truck Centre Decision to the proceedings, and if the Court will agree that the situations for residents and non-residents are not comparable.

Robert van der Jagt

Chairman, KPMG’s EU Tax Centre

Partner, Meijburg & Co

Barry Larking

Director EU Tax Services

KPMG’s EU Tax Centre

Ann Torner

Director, Financial Services Tax

KPMG Sweden

Caroline Valjemark

EU Country Leader Senior Manager

KPMG Sweden