In December 2024, the Council of the European Union, adopted a new directive on withholding tax, called "FASTER". The directive is aimed at simplifying the member states' systems for withholding tax on dividends and interest. In this article, nomadtax briefly reviews the legislation and analyzes its impact from a Swedish perspective.
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 new EU directive on withholding tax implying?
The background to the new EU directive 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 new EU directive 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.
According to the directive, EU member states have until 31 december 2028 to implement the directive into domestic legislation. Sweden has not yet implemented the legislation, but it is expected that this will happen within the next few years. Nomadtax is monitoring the legislative process, and will update this article when there is more news.
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