June 30, 2022
Swedish Ministry of Finance proposes new Withholding Tax Act
On 7 June 2022, the Swedish Ministry of Finance published a memorandum with a proposal for a new withholding tax law related to dividend distributions. A first proposal was originally published on 29 April 2020, but the legislative process was paused without an official explanation, likely due to COVID-19. Some changes have been made between the first and second proposal, but this Alert does not cover those changes in detail. If the law enters into force, it will impact the withholding tax on dividends.
The main proposals in the memorandum are:
The proposal is currently subject to public consultation and the consultation period ends on 7 October 2022
If the proposal results in a law bill which is enacted by Parliament, the main part of the proposed legislation is intended to enter into force on 1 January 2024. The regulation regarding authorized intermediaries (godkända mellanhänder) is proposed to enter into force on 1 July 2023.
The beneficial owner concept in the proposed legislation will be amended to align more closely with the beneficial owner concept in the OECD's Model Tax Convention. The beneficial owner concept will also be aligned with the Swedish Income Tax Act.
The beneficial owner will, under the main rule, be considered to be any physical person or entity that is entitled to the dividend on the dividend date and that is not subject to unlimited tax liability in Sweden. The definition of "dividend date" will vary depending on the nature of the entity which pays the dividend and on whether the entity utilizes a withholding tax agent or securities depository such as Euroclear.
The amended beneficial owner concept also means that foreign contractual funds or similar entities, which are not legal persons, may become subject to withholding tax in Sweden. This is not the case under the current Withholding Tax Act, which only applies to physical persons and foreign legal persons.
Foreign investment funds and foreign special funds which are residents in the European Economic Area (EEA) or in a state with which Sweden has a double tax treaty or a treaty on information exchange, should continue to not be liable for withholding tax. Previously established case law regarding these types of funds should still be applicable under the proposed legislation.
New regulations will be introduced that concern securities lending.
As a starting point for securities lending, the lender in a securities lending transaction should not be considered to be the beneficial owner for withholding tax purposes if a security has been lent to a borrower on the dividend date. The borrower will instead be considered to be the beneficial owner.
Under certain circumstances, a lender of securities may be considered to be the beneficial owner in cases where the borrower sends dividend compensation (utdelningsersättning) to the lender under the terms of a securities lending agreement. The lender may become subject to taxation if the loan was entered into with the prerequisite of dividends compensation to the lender, or if there is a restricted right for the borrower to dispose of the dividends.
The changes are intended to align the proposed legislation with existing case law regarding securities lending and to expand the applicability of the anti-avoidance rules.
New anti-avoidance regulations
New anti-avoidance rules and will be introduced and withholding tax will also become subject to the existing General Swedish Tax Avoidance Act.
Under the proposed anti-avoidance rule, a person or entity that is subject to unlimited tax liability (and should therefore be exempt from withholding tax) and that is entitled to a dividend may become liable for withholding tax, if the entitlement is the result of proceedings which are intended to achieve withholding tax benefits that should otherwise not be available.
If the above-mentioned proceedings have taken place, then any other exceptions from withholding tax, such as those which apply to foreign investment funds and special funds, will also not be applicable regardless of whether the person or entity is subject to unlimited tax liability.
General anti-avoidance regulation
The current General Swedish Tax Avoidance Act will also apply to the proposed legislation. In summary, the Tax Evasion Act states that a transaction may be adjusted, re-characterized, or disregarded for tax purposes if all of the following conditions are met:
It is stated in the memorandum that the application of the Tax Evasion Act to the proposed legislation should enable Swedish authorities and courts to assess cases where a combination of income tax and withholding tax leads to unwanted tax consequences, which is not possible under the proposed legislation alone. The Tax Evasion Act also enables Sweden to utilize additional sanctions and penalties that will not be contained in the proposed legislation. It is also stated that this implementation should be compatible with European Union law and with existing tax treaties.
The proposed legislation contains rules on which entities that can be authorized to act as withholding tax agents (authorized intermediaries). The primary responsibility to withhold taxes will still be placed on the dividend paying company. In the case of dividends paid out to authorized intermediaries for further payment to the intended dividend recipients, no deduction for withholding tax should be made at the level of the dividend paying company. The responsibility for the deduction and reporting of withholding tax is instead placed on the authorized intermediaries.
Authorized intermediaries can be Central Securities Depositaries (such as Euroclear) or legal persons which are registered with a Central Securities Depository either in Sweden or in the relevant country of residence. The country of residence must be either an EEA member or a country with which Sweden has a tax treaty that includes provisions on exchange of information and tax collection assistance. Authorized intermediaries must register their commitment to perform correct withholding tax deductions and to report any necessary information with the Swedish Tax Agency.
Intermediaries that have not applied for authorizations, or which have not been granted authorizations, will not be responsible for deducting and reporting withholding tax, and will also not be able to provide relief at source (see "Relief at source" section below).
Applications for status as authorized intermediary will be handled by the Swedish Tax Agency, starting from 1 July 2023.
Relief at source
Relief at source is currently available in Sweden for dividend recipients that enjoy the benefits of double tax treaties, due to rules that apply to securities depositories such as Euroclear. These rules are not contained in the current Withholding Tax Act. In the proposed legislation, the right to relief at source will be enshrined in the law itself. The intention is for relief at source to be the main mechanism of withholding tax reduction, if it has been made clear that a tax treaty applies to a dividend and a dividend recipient.
In order to provide a dividend recipient with relief at source, the entity responsible for handling withholding tax (i.e., the dividend payer or an authorized intermediary) must provide data regarding the affected dividend recipients on an individual level. If the data is missing or incomplete, then the payer or intermediary should deduct full withholding tax. Pooled data regarding such dividend recipients will no longer be accepted as a basis for relief at source.
Relief at source will still not be available if it is prohibited due to a tax treaty or other international agreement, as currently is the case for dividends paid to recipients who are resident in Switzerland.
The proposed legislation obliges the taxpayer to ensure that authorized intermediaries or dividend paying companies have correct information regarding withholding tax, and to inform the intermediary or company of any changes in the relevant information.
Dividend payers and authorized intermediaries which deduct withholding tax will in turn be required to file withholding tax returns for each dividend payout with information on the dividend recipients, the shares that the dividend pertains to, the dividend date and the amount of tax that is being withheld. Additional details may be required depending on whether relief at source or authorized intermediaries are utilized. Under certain circumstances, it may also be necessary to file tax returns for dividends which are not paid out (e.g., dividends in kind) in certain situations.
Procedural regulation for withholding tax will be implemented into, inter alia, The Swedish Tax Procedure Act. The statute of limitations for withholding tax reclaim applications will be extended to the end of the sixth year after the calendar year during which a particular financial year ends, effectively an extension from five years to six years. This extension applies from dividends paid out on 1 January 2024 and onwards, meaning that the old Withholding Tax Act and the old statute of limitations will continue to apply to any dividends paid out before that date.
A general right to receive interest on repaid withholding tax, after a successful reclaim application, will be introduced as part of the implementation into the Tax Procedure Act.
For additional information with respect to this Alert, please contact the following:
Ernst & Young AB, Stockholm