Judgment summary
The case concerns interest income received by a Swedish company from a related Norwegian company during the 2011 and 2012 income years, which had been taxed in Sweden. The Norwegian tax authority, applying the arm's length principle, refused to allow the Norwegian borrower to deduct part of the corresponding interest expenses.
The Swedish 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, and the case proceeded through the Administrative Court, the Administrative Court of Appeal, and finally to the Supreme Administrative Court.
The central legal question was whether Article 9(2) is directed only at the competent authorities of the contracting states (in Sweden, the Swedish Tax Agency) or whether the administrative courts may also apply it when reviewing a taxation decision.
Background
There is a tax treaty between the Nordic countries aimed at avoiding double taxation of income (paragraph 1). Article 9(2) provides that where one state taxes income on an arm's length basis that is also taxed in another state, the other state must make a 'corresponding adjustment' if it considers the adjustment justified in principle and in amount, with consultation between competent authorities as necessary (paragraph 2). In Sweden, the competent authority is the Swedish Tax Agency (paragraph 2, 11).
[........................] had interest income from a related Norwegian company during the 2011 and 2012 income years, taxed in Sweden, while the Norwegian tax authority refused to allow the Norwegian company to deduct part of the corresponding interest expenses (paragraph 3).
The company requested a review of the Tax Agency's decisions for 2011 and 2012, arguing that a corresponding adjustment should be made under Article 9(2) (paragraph 4). The Tax Agency found the Norwegian decision incompatible with the arm's length principle and maintained its position (paragraph 5). The Administrative Court in Stockholm took the opposite view and exempted the interest income. The Administrative Court of Appeal, on the Tax Agency's appeal, held that Article 9(2) was addressed to the competent authorities, not the courts, and that the income therefore could not be exempted by the court (paragraph 6).
Core dispute
The dispute concerned whether Article 9(2) of the Nordic Tax Convention could be applied by the administrative courts following an appeal against a Swedish Tax Agency taxation decision, or whether it was directed solely at the competent authorities (in Sweden, the Tax Agency) acting in that capacity.
The company argued that the interest income should not be taxed in Sweden and that the Administrative Court of Appeal's judgment should be set aside so the merits could be considered under Article 9(2) (paragraph 7). The Swedish Tax Agency, while maintaining that the interest income should be taxed in full, agreed that the judgment should be set aside and the case referred back, and accepted that courts may apply Article 9(2) following an appeal against a reassessment decision, distinguishing this from the Tax Agency's role as competent authority (paragraphs 8, 9).
Court findings
The Supreme Administrative Court held that the Nordic Tax Convention, transposed into Swedish law, takes precedence over internal tax provisions where its application would restrict tax liability in Sweden (paragraph 14, citing RÅ 2008 ref. 24 and HFD 2010 ref. 112).
The Tax Agency, in its taxation activities, must take into account applicable tax treaties, including provisions restricting tax liability, and the courts must do the same when reviewing an appeal against a taxation decision (paragraph 15).
Article 9(2) requires a corresponding adjustment where justified in principle and amount, and this is something the Tax Agency addresses in its capacity as taxing authority (paragraph 16). Where the Tax Agency considers the conditions for adjustment not met and its decision is appealed, it falls to the court to determine whether the Tax Agency was justified; if the court finds the foreign taxation measure consistent with the arm's length principle, a corresponding adjustment must be made (paragraph 17).
The Tax Agency's role as competent authority in initiating consultations with another state does not mean only the Tax Agency can make a corresponding adjustment, nor does it prevent the administrative courts from doing so (paragraph 17). The Court therefore held that, following an appeal against a tax assessment decision, an administrative court may consider whether a corresponding adjustment under Article 9(2) should be made (paragraph 18).
The Administrative Court of Appeal had not addressed whether Article 9(2) restricted the company's tax liability in Sweden, so its judgment had to be set aside and the case referred back for that consideration (paragraph 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 in accordance with paragraph 19, namely whether Article 9(2) of the Nordic Tax Convention restricts the company's tax liability in Sweden.
The Supreme Administrative Court awarded the company compensation for costs in the Supreme Administrative Court in the amount of SEK 119,990, finding the cases concerned an issue of importance for the application of the law and that the amount claimed was reasonable (paragraph 20).
Tp method highlighted
The judgment does not set out a specific transfer pricing method such as CUP or TNMM. It concerns the application of the arm's length principle under Article 9 of the Nordic Tax Convention, whereby the Norwegian tax authority disallowed part of the interest expense deduction claimed by the related Norwegian borrower on the basis that the terms were not those which would have been agreed between independent enterprises (paragraph 3, 10). The Swedish case turned on whether a corresponding adjustment should follow in Sweden in respect of the matching interest income, rather than on the substantive pricing methodology itself.
Major issues / areas of contention
- Whether Article 9(2) of the Nordic Tax Convention is addressed only to the competent authorities (in Sweden, the Swedish Tax Agency) or also to the administrative courts.
- Whether an administrative court may, on appeal against a Tax Agency taxation decision, consider and grant a corresponding adjustment under Article 9(2).
- Whether the tax treaty, as transposed into Swedish law, takes precedence over domestic tax provisions where it restricts tax liability in Sweden.
- Whether the Norwegian tax authority's disallowance of part of the interest expense deduction was in accordance with the arm's length principle, a question left for the Administrative Court of Appeal to determine on referral.
- Entitlement of the company to compensation for legal costs incurred in the Supreme Administrative Court.