During the summer of 2023, the EU Commission presented a legislative proposal in the form of an EU directive ("FASTER") aimed at simplifying the member states' systems for withholding tax on dividends and interest. In this article, nomadtax briefly reviews the proposal and analyzes its potential impact from a Swedish perspective.
*Update* - The EU member states reached an agreement on the new EU regulation. Member states will have until 31 December 2028 to implement the regulation in national law.
What is the Swedish withholding tax?
Withholding tax, also known as source tax, is a tax levied on dividends and interest from Swedish sources to so-called non-tax residents. As a general rule, Sweden aims to tax dividends from a Swedish company, going to a shareholder who is limitedly liable for tax (non-tax resident), with the Swedish withholding tax at 30%.
Normally, the withholding tax of 30% is deducted at the time of dividend payment, resulting in the shareholder or interest recipient receiving only 70% of the income. The remaining 30% is remitted to the Swedish Tax Agency.
At the same time, there are various rules limiting Sweden's right to impose withholding tax. For instance, dividends covered by the EU's parent-subsidiary directive are exempt from withholding tax. Dividends subject to the Swedish participation exemption, are also exempt from withholding tax. Each tax treaty also has provisions restricting Sweden's right to impose withholding tax. Most tax treaties stipulate that Sweden is only entitled to impose withholding tax at 15%, to a shareholder resident in a state other than Sweden.
In some cases, the financial institution which shares are owned or the company paying out dividends may reduce the withholding tax deducted from dividends. This requires the shareholder to provide information demonstrating that they are not obliged to pay withholding tax or that they should only pay a lower withholding tax due to a tax treaty's provisions.
Simultaneously, it is not uncommon for excess withholding tax to occur on dividends. This is often the case for, for example, Swedish individuals owning Swedish shares through a foreign (non-Swedish) bank. Since such individuals are tax residents in Sweden, they should not pay any non resident withholding tax. In these cases, when excess withholding tax has been withheld and remitted to the Swedish Tax Agency, the shareholder can apply for a refund of withholding tax from the Swedish Tax Agency.
What is the EU's legislative proposal on withholding tax?
The background to the EU's legislative proposal is that the process of reducing withholding tax or applying for a refund of withholding tax is often administratively demanding and time-consuming. This hinders investments within the European Union, which is naturally undesirable.
An individual owning shares in companies domiciled in multiple countries may need to apply for a refund of withholding tax in these countries, which is rarely a straightforward process. Residence certificates must be applied for in relation to different countries and years, applications must be filled out, supporting documents must be presented, and then the shareholder must wait for the tax authority in the relevant state to process the refund application. The EU's legislative proposal essentially involves two main points:
A common system with digital residence certificates ("eTRC") to apply to all member states. The certificate should be issued within a maximum of one day and should cover at least the entire calendar year in which the application is made.
Procedures for the direct reduction of withholding tax and/or refund of withholding tax, including that the refund of withholding tax should occur within a maximum of 50 days after the application.
What are the consequences in Sweden of the EU's legislative proposal on withholding tax?
In 2020, a Swedish legislation committee submitted a legislative proposal for a new system of withholding tax on dividends. The proposal faced strong criticism and has therefore been put on hold. The government announced in early 2023 that it intends to await the common EU rules expected to come into force in 2027.
It is therefore unlikely that any new Swedish law on withholding tax will be introduced before EU countries agree on a common directive for withholding tax. It remains to be seen how this will affect withholding tax on dividends from Swedish companies.
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