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

As previously reported, on 18 December 2007, the European Court of Justice (ECJ) gave its decision in the case of Skatteverket v. A (C-101/05). Details of the judgment are summarized below.

(a) Facts.  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) Decision.

Scope of the free movement of capital

At the outset, referring to its judgment in Sanz de Lera (joined cases C-163/94, C-165/94 and C-250/94), the ECJ confirmed that Art. 56(1) of the EC Treaty (free movement of capital) has a direct effect in relations between Member States and third countries. Thus, as regards the movement of capital between Member States and third countries, the EC free movement of capital may be relied on before national courts and may render incompatible national rules inapplicable, regardless of the category of the capital movement concerned.

While acknowledging that the liberalization of capital movements with third countries may pursue different objectives, the ECJ observed that the Member States enshrined the principle of free movement of capital vis-à-vis third countries in the same article of the EC Treaty and in the same terms as for capital movements taking place between Member States. To take account of the aforementioned objectives and the different legal context of the liberalization of the movement of capital with third countries, the EC Treaty provides for safeguard clauses and derogations which apply specifically to the movement of capital to or from third countries (Arts. 57, 59, and 60 of the EC Treaty). The Court pointed out that the different legal context of the movement of capital in relation to third countries may justify a restriction on that movement for a reason, which would not constitute a valid justification for a restriction on capital movements between Member States.

Restriction on the free movement of capital

The ECJ held that the Swedish legislation in question constitutes a restriction on the free movement of capital, since, by providing for a less favourable treatment of the dividends received from companies established outside the EEA, it discourages Swedish taxpayers from investing their capital in these companies.

The ECJ further considered whether the standstill provision of Art. 57(1) of the EC Treaty may be applicable to the case at issue, since it was not explicitly precluded by the referring court that the dividends in question may relate to direct investment. The Court concluded that the preclusion, since 1992, from the Swedish exemption of dividends paid by companies established in the third countries concerned must be deemed a restriction which existed on 31 December 1993 for the purposes of Art. 57(1) of the EC Treaty (at least where such dividends relate to a direct investment in the distributing company). The fact that the 1992 Swedish legislation was abolished in 1994 and reintroduced in 1995 has no bearing on this conclusion, since the exemption was removed continuously, as of 1992, for the third-country dividends in question (i.e. the restriction on the free movement of capital in this case continued to exist even after the repeal of the relevant legislation in 1994). It is for the referring court to verify whether the dividends received relate to direct investment, and thus whether the standstill provision of Art. 57(1) of the EC Treaty applies.

Justifications

Since it was not clear from the national court's reference whether the dividends in question relate to direct investment (in which case the application of the Swedish legislation would not be precluded), the Court also considered possible justifications of the restriction by overriding requirements of the general interest. The need to ensure the effectiveness of fiscal supervision is one such requirement capable of justifying a restriction (Futura Participations and Singer (C-250/95), Lenz, etc.), subject to the proviso that the relevant national measure is proportionate to the objective pursued.

Referring to its settled case law in Bachmann (C-204/90), Elisa, etc., the ECJ recalled that Member States cannot rely on the fact that it may be impossible to seek cooperation from another Member State (for example, under the provisions of the Mutuual Assistance Directive77/799/EC) in order to justify a refusal to grant a tax advantage, unless the required evidence was directly requested from, but not provided by, the taxpayer. The Court, however, observed that this case law cannot be applied in its entirety to the movement of capital to or from third countries, as that movement takes place in a different legal context. First, third countries are not bound by the secondary legislation, such as the Mutual Assistance Directive 77/799/EC which (i) provides for reciprocal obligations of mutual assistance and (ii) sets out a framework for cooperation between the competent authorities of the Member States which does not exist between those authorities and the competent authorities of a third country where the latter has given no undertaking of mutual assistance. Second, as regards the documentary evidence which the taxpayer may provide to enable the tax authorities to assess whether the requirements under national legislation are satisfied, the EC harmonization measures on company accounts allow taxpayers to produce reliable and verifiable evidence on the structure and activities of a company established in another Member State, something that is not necessarily the case where a third-country company is involved.

The ECJ thus held 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 obtained from the tax authorities of the country of establishment of the company paying the dividends. It is for the national court to verify whether these conditions are met.

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