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ECJ: Advocate General finds Swedish legislation limiting the exemption of third-country dividends justifiable restriction on EC free movement of capital – details

On 11 September 2007, Advocate General Yves Bot of the European Court of Justice (ECJ) gave his opinion in case of Skatteverket v. A (C-101/05). Details of the opinion are summarized below.

(a) Facts and legal background.Under Swedish legislation, dividends (in the form of shares in a subsidiary) received, inter alia, from a parent company situated within the European Economic Area (EEA) or in a country with which Sweden has concluded a tax treaty, containing an exchange of information clause, are exempt under certain conditions.

In the case at issue, a Swedish resident individual received dividends in the form of shares in a subsidiary from a Swiss company. Sweden has concluded a tax treaty with Switzerland; the treaty however does not contain an exchange of information clause. The Swedish tax authorities therefore concluded that the conditions for claiming the exemption were not met. The case was subsequently brought before the Supreme Administrative Court (Regeringsträtten), which referred the case to the ECJ for a preliminary ruling.

(b) Issue. The issue was whether or not the Swedish legislation exempting inbound dividends (in the form of shares in a subsidiary) on condition that they are distributed by a parent company established within the EEA or a country with which Sweden has concluded a tax treaty, containing an exchange of information clause, constituted a restriction on the EC free movement of capital (Art. 56 of the EC Treaty) and, if so, whether this restriction could be justified.

(c) Advocate General's opinion.

Scope of the EC freedoms

At the outset of his analysis, the Advocate General (AG) clarified the scope of the EC free movement of capital in relation to third countries. He noted that the wording of Art. 56(1) of the EC Treaty clearly indicated that the scope of the free movement of capital in relation to Member States, on the one hand, and between those Member States and third countries, on the other, should be identical. To support his position, the AG suggested that the different objectives followed by the free movement of capital in relation to third countries were reflected in the specific provisions and exceptions set forth in Arts. 57, 59, and 60 of the EC Treaty. AG Bot thus rejected the argument put forward by several governments that the payment of dividends by a third-country company (inbound dividends) was not covered by the EC free movement of capital.

To determine whether the case at issue should be assessed in the light of the EC freedom of establishment (Art. 43 of the EC Treaty) or the EC free movement of capital (Art. 56), AG Bot recalled recent ECJ cases concerning the scope of these fundamental freedoms (Cadburry Schweppes, Thin Cap GLO, Lasertec). According to this case law, where a controlling interest is present in the company paying the dividends, the relevant national provisions must be considered only in the context of Art. 43 of the EC Treaty, which does not apply in third-country situations; possible restrictions on the free movement of capital (Art. 56) are then deemed to be an unavoidable consequence of the restriction on the EC freedom of establishment. He opined however that national provisions, which provide for a different tax rate for domestic or foreign inbound dividends, regardless of the size of the shareholding held, should fall within the scope of the EC free movement of capital (Art. 56). By reference to the wording of Art. 57(1) of the EC Treaty, he concluded that the free movement of capital could include an element of "establishment". AG Bot noted that possible circumvention of the EC Treaty provisions on the freedom of establishment (which do not apply in third-country situations) by third-country nationals could be prevented through Art. 58(2) of the EC Treaty which justifies the adoption of restrictive measures to address such cases. Consequently, the issue had to be examined in the light of the EC free movement of capital.

Restriction on the EC free movement of capital

The AG found that the Swedish legislation in question constituted a restriction to the EC free movement of capital, since it (i) discouraged Swedish taxpayers from investing in the third countries concerned (i.e. countries outside the EEA and countries which have not concluded a tax treaty with Sweden, containing an exchange of information clause), and (ii) amounted to an obstacle for these third-country companies in raising capital in Sweden.

Justifications

AG Bot concluded that the standstill provision of Art. 57(1) of the EC Treaty did not apply in the case at hand, since the Swedish provisions – although existing on 31 December 1993 – were abolished in 1994 and subsequently reintroduced in 1995.

AG Bot then considered possible justifications of the restriction on the free movement of capital under Art. 58 of the EC Treaty. The AG argued, by referring to the ECJ's judgement in the FII GLO case, that the need to ensure the effectiveness of fiscal supervision as a ground for justification should be given a wider application for transactions involving third countries, since, unlike the Member States, these countries are not bound by obligations under the secondary legislation on the exchange of information. To constitute a valid justification based on the need to ensure the effectiveness of fiscal supervision, the national measure in question must be proportionate to its objectives. The AG concluded that the Swedish legislation is justified, as long as the Swedish tax authorities are unable to assess the fulfilment of the conditions for claiming the exemption of dividends received from third countries, and the information, required for such an assessment, can only be collected by the tax authorities of the country of establishment of the company paying the dividends.

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