Judgment summary
The case concerns a company that received interest income from a related company in Norway during the 2011 and 2012 income years, which was taxed in Sweden. The Norwegian tax authority, applying the arm's length principle, had refused to allow the Norwegian borrower to deduct part of the corresponding interest expenses (para 3).
The company sought a corresponding adjustment under Article 9(2) of the Nordic Tax Convention so that the interest income would not be taxed in Sweden. The Swedish Tax Agency refused, considering the Norwegian decision incompatible with the arm's length principle (paras 4 to 5).
The Administrative Court in Stockholm found in the company's favour and exempted the income from taxation. The Administrative Court of Appeal reversed this, holding that Article 9(2) is addressed to the competent authorities, in Sweden the Swedish Tax Agency, and not to the courts, so the courts could not exempt the income (paras 5 to 6).
The Supreme Administrative Court held that administrative courts, on appeal against a tax assessment decision, may consider whether a corresponding adjustment under Article 9(2) should be made. It set aside the Administrative Court of Appeal's judgment and referred the case back for consideration of whether Article 9(2) restricts the company's tax liability in Sweden (paras 17 to 19).
Background
There is a tax treaty between the Nordic countries aimed at avoiding double taxation of income. Under Article 9(2), transactions between associated companies in different countries may be taxed on the arm's length basis, and if one country taxes income on that basis which is also taxed in another country, that other country must make a 'corresponding adjustment' if it considers the adjustment justified in principle and in amount (paras 1 to 2).
In Sweden, the competent authority for these purposes is the Swedish Tax Agency, under the Ordinance (1998:1314) on the application of the double taxation agreement between the Nordic countries (para 11). The Nordic tax convention is given the force of law in Sweden by the Act (1996:1512) on the double taxation convention between the Nordic countries, and its taxation rules apply only insofar as they restrict tax liability that would otherwise exist in Sweden (para 12).
The company had interest income from a related Norwegian company for the 2011 and 2012 income years, which was taxed in Sweden. The Norwegian tax authority refused to allow the Norwegian company to deduct part of the corresponding interest expenses, applying the arm's length principle (para 3). The company requested a review of the Swedish Tax Agency's taxation decisions for those years, arguing for a corresponding adjustment under Article 9(2) (para 4).
Core dispute
The dispute concerned whether the Swedish courts have the power to apply Article 9(2) of the Nordic Tax Convention and make a corresponding adjustment to reduce the taxation of interest income in Sweden, or whether this power belongs exclusively to the Swedish Tax Agency in its capacity as the competent authority under the convention (paras 6 and 9).
The company argued that the interest income should not be taxed, and alternatively that the case should be referred back to the Administrative Court of Appeal for consideration of the merits under Article 9(2) (para 7). The Swedish Tax Agency argued that the interest income should be taxed in full but agreed that the case should be referred back and that the company should be awarded its costs. The Tax Agency submitted that it had applied Article 9(2) as a tax authority, not as the competent authority, in the review case, and that courts may also apply the article on appeal (paras 8 to 9).
Court findings
The Supreme Administrative Court noted that the interest income was taxable in Sweden under domestic law and fell within the scope of the Nordic tax treaty, so the question was whether taxation should be reduced because Norway had disallowed the corresponding deduction (para 13).
The court held that Sweden is bound under international law by the tax treaty, which has the same status as other Swedish legislation under the transposition act, and that where application of the treaty means certain income is not taxable in Sweden, the treaty must take precedence over internal tax provisions, citing RÅ 2008 ref. 24 and HFD 2010 ref. 112 (para 14).
The Swedish Tax Agency must apply treaty provisions restricting tax liability in its taxation activities, and a court considering an appeal against a taxation decision must likewise apply such treaty provisions (para 15).
Article 9(2) requires a corresponding adjustment where the adjustment is considered justified both in principle and in amount, something the Swedish Tax Agency does in its capacity as taxing authority (para 16). Where the Tax Agency considers the conditions for adjustment are not met and its decision is appealed, it is for the court to determine whether the Tax Agency was justified. If the court finds that the taxation measure in the other country accords with the arm's length principle, a corresponding adjustment must be made. The Tax Agency's role as competent authority in initiating consultations with another country does not mean only the Tax Agency can make a corresponding adjustment under Article 9(2), nor does it prevent the administrative courts from doing so (para 17).
The court concluded that, following an appeal against a tax assessment decision, an administrative court may consider whether a corresponding adjustment under Article 9(2) of the Nordic tax convention should be made (para 18). The Administrative Court of Appeal had not taken a position on whether Article 9(2) restricts the company's tax liability in Sweden (para 19).
Outcome
The Supreme Administrative Court set aside the judgment of the Administrative Court of Appeal and referred the cases back to that court for consideration of whether Article 9(2) of the Nordic tax treaty restricts the company's tax liability in Sweden, in accordance with paragraph 19.
The Supreme Administrative Court awarded the company compensation for costs in the Supreme Administrative Court in the amount of SEK 119,990, finding that the cases concerned an issue of importance for the application of the law and that the amount claimed was reasonable (para 20).
Tp method highlighted
The case concerns the arm's length principle under Article 9(2) of the Nordic Tax Convention, which allows for a 'corresponding adjustment' where a Contracting State taxes income of an enterprise on an arm's length basis that is also taxed on the related enterprise in another Contracting State. Such an adjustment must be made by the other State only if it considers the adjustment justified both in principle and in amount, in accordance with the other provisions of the Agreement, with consultation between competent authorities as necessary (para 10).
The underlying transfer pricing issue arose because the Norwegian tax authority, applying the arm's length principle, refused to allow the Norwegian related company to deduct part of its interest expenses payable to the Swedish company, while Sweden had taxed the corresponding interest income in full (para 3).
Major issues / areas of contention
- Whether Article 9(2) of the Nordic Tax Convention can be applied by administrative courts, or only by the Swedish Tax Agency as the designated competent authority
- Whether interest income taxed in Sweden should be reduced through a corresponding adjustment because Norway, applying the arm's length principle, denied the related borrower a matching interest deduction
- Whether tax treaty provisions restricting tax liability take precedence over domestic tax law
- Whether the Administrative Court of Appeal was correct to hold that it could not consider the merits of a corresponding adjustment claim under Article 9(2)