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Print articleTreaty Override – a Tax Treaty’s relation to (new) Swedish CFC rules
October, 2008 -
On 3 April 2008, the Supreme Administrative Court announced a decision in a case which has given rise to strong reactions among tax law specialists. The criticism has been harsh and concerns the Supreme Administrative Court’s decision to give the Swedish CFC-rules precedence over the Swedish-Swiss tax treaty. On a more general level, the question concerns whether Sweden, in the light of the Supreme Administrative Court’s statement, complies with international legal undertakings which the tax treaties involve. A negative answer to that question would naturally have serious consequences, not merely for the tax area. The background is the following.
OMX Treasury AB (the parent company) owned all shares in the Swiss company OM Insurance (the subsidiary). Both companies were part of the OMHEX Group. The subsidiary’s only business was to re-insure internal risks within the group. In accordance with the provisions in chapter 39 of the income tax act, the pre-requisites for CFC taxation of the parent company were at hand. CFC taxation means that a Swedish natural person or legal entity is taxed for shareholdings in a foreign, low-taxed company. The taxation is made on an on-going basis and is based on the foreign company’s net income.
The parent company requested an advance ruling from the Board for Advance Tax Rulings (Sw. Skatterättsnämnden). The first question to which the company requested an answer (which was the question which would lead to today’s lively discussion) was whether the tax treaty between Sweden and Switzerland prevented Sweden from CFC taxation of the parent company. The Board for Advance Tax Rulings’ conclusion was that the tax treaty in this specific case did not constitute a bar to applying the Swedish CFC rules. However, one member of the Board dissented.
The company appealed to the Supreme Administrative Court, which reached the same conclusion, however with a different rationale. The Supreme Administrative Court did not assess the tax treaty per se, but concluded instead that the CFC rules prevailed over tax treaty’s incorporation act [incorporation act means the act which incorporates the international tax treaty into Swedish legislation].The Supreme Administrative Court justified its position by stating that an incorporation act is not unique in any way in relation to other acts. In other words, according to the Supreme Administrative Court, incorporation acts and the CFC rules have the same status. When the conflict arose in this case between the two acts, the Supreme Administrative Court used the principles of lex posterior (acts enacted later take precedence) and lex specialis (special acts take precedence over general acts).
The opinion of the Supreme Administrative Court that an incorporation act and the CFC rules have the same status in their capacity as acts is hard to argue with. It should not, however, be as obvious to dismiss an incorporation act and its related tax treaty by referring to later legislation. Naturally, the problem is that a tax treaty is a joint agreement between two states and in which the states, through the tax agreement, undertakes to follow the provisions in the agreement. If it would be possible for one of the states to disregard the contents of the agreement simply by enacting new domestic laws, the whole point of the possibility of states entering into treaties with each other is lost.
It is a fundamental principle in all contractual relations that agreements are to be kept. It is an equally fundamental principle that the contents of an agreement, normally, unilaterally at one’s discretion cannot be changed afterwards by one of the parties. The Supreme Administrative Court’s statements in the above mentioned case means a deviation from the tax treaty and hence also from the agreement Sweden has made with Switzerland. It will therefore be interesting to follow the development in the wake of the Supreme Administrative Court’s decision and question remains regarding whether this case will form a precedent.
For further questions please contact Delphi’s Tax department, phone: +46 8 677 54 00
OMX Treasury AB (the parent company) owned all shares in the Swiss company OM Insurance (the subsidiary). Both companies were part of the OMHEX Group. The subsidiary’s only business was to re-insure internal risks within the group. In accordance with the provisions in chapter 39 of the income tax act, the pre-requisites for CFC taxation of the parent company were at hand. CFC taxation means that a Swedish natural person or legal entity is taxed for shareholdings in a foreign, low-taxed company. The taxation is made on an on-going basis and is based on the foreign company’s net income.
The parent company requested an advance ruling from the Board for Advance Tax Rulings (Sw. Skatterättsnämnden). The first question to which the company requested an answer (which was the question which would lead to today’s lively discussion) was whether the tax treaty between Sweden and Switzerland prevented Sweden from CFC taxation of the parent company. The Board for Advance Tax Rulings’ conclusion was that the tax treaty in this specific case did not constitute a bar to applying the Swedish CFC rules. However, one member of the Board dissented.
The company appealed to the Supreme Administrative Court, which reached the same conclusion, however with a different rationale. The Supreme Administrative Court did not assess the tax treaty per se, but concluded instead that the CFC rules prevailed over tax treaty’s incorporation act [incorporation act means the act which incorporates the international tax treaty into Swedish legislation].The Supreme Administrative Court justified its position by stating that an incorporation act is not unique in any way in relation to other acts. In other words, according to the Supreme Administrative Court, incorporation acts and the CFC rules have the same status. When the conflict arose in this case between the two acts, the Supreme Administrative Court used the principles of lex posterior (acts enacted later take precedence) and lex specialis (special acts take precedence over general acts).
The opinion of the Supreme Administrative Court that an incorporation act and the CFC rules have the same status in their capacity as acts is hard to argue with. It should not, however, be as obvious to dismiss an incorporation act and its related tax treaty by referring to later legislation. Naturally, the problem is that a tax treaty is a joint agreement between two states and in which the states, through the tax agreement, undertakes to follow the provisions in the agreement. If it would be possible for one of the states to disregard the contents of the agreement simply by enacting new domestic laws, the whole point of the possibility of states entering into treaties with each other is lost.
It is a fundamental principle in all contractual relations that agreements are to be kept. It is an equally fundamental principle that the contents of an agreement, normally, unilaterally at one’s discretion cannot be changed afterwards by one of the parties. The Supreme Administrative Court’s statements in the above mentioned case means a deviation from the tax treaty and hence also from the agreement Sweden has made with Switzerland. It will therefore be interesting to follow the development in the wake of the Supreme Administrative Court’s decision and question remains regarding whether this case will form a precedent.
For further questions please contact Delphi’s Tax department, phone: +46 8 677 54 00
