For several years, the Swedish Tax Agency (Skatteverket) has held an internationally divergent view regarding whether tax treaties apply to income received by partnerships, or so-called tax-transparent legal entities. The Swedish Tax Agency maintains that all tax treaties to which Sweden is a party do not cover foreign partnerships unless this is explicitly stated in the treaties. The Administrative Court of Appeal in Gothenburg has now overturned the Tax Agency's reasoning in a ruling, rejecting their interpretation.
"Given the ruling, there should be an opportunity for individuals to request a reassessment and recover incorrectly charged taxes from the Swedish Tax Agency (..)"
What is a Partnership?
As the name suggests, a partnership is not taxed on its income. Instead, it is the partners of a partnership who are taxed. In Sweden, "handelsbolag" and "kommanditbolag" are taxed in this manner. Under U.S. law, it is possible to choose whether an "LLC" will be taxed at the partner level (as a S-corp) or as a corporation.
How Are Partnerships Taxed?
As a general rule, partners in partnerships are taxed on the share of the partnership's profits to which they are entitled (according to law or an agreement between the partners). However, according to Swedish tax law, in some situations, the Swedish taxation may deviate from this method. These situations typically involve cases where it is suspected that the distribution of profits has been structured to achieve tax advantages, or where the allocation is considered unreasonable or constitutes an improper income transfer.
A shareowner/partner in a partnership is taxed with Swedish Income Tax, which ranges from 30 % to 55 %. Together with Swedish Social Security Fees, the combined rate can exceed 80 %.
According to Swedish tax law, a partner/shareholder in a partnership, is liable to Swedish tax on the partnership's profit, if that partner has status as tax resident in Sweden. Therefore, it is not uncommon for shareholders in foreign (non-Swedish) partnerships to be subject to double taxation, since the business of such entities often is carried out in the country where they are registered. Therefore, it is highly relevant for such a partner/shareholder to be able to benefit from a double tax treaty.
Can Partners in Foreign Partnerships Benefit from Tax Treaties?
As mentioned earlier, the Swedish Tax Agency has long held a highly divergent view on whether tax treaties can be applied by partners in foreign partnerships. The Swedish Tax Agency argues that tax treaties cannot apply to the income of foreign partnerships unless it is explicitly stated in the treaty that this is the case.
This position contradicts the OECD's commentary, which is the primary legal source for interpreting tax treaties. It also conflicts with how other countries view tax treaties, as well as the perspective within international legal doctrine. Therefore, strong justification should be required to support such an interpretation. The Tax Agency has referred to a ruling from the Swedish Supreme Administrative Court, HFD 2014 ref. 71, and certain statements in preparatory works to support its position.
The Tax Agency's stance has resulted in partners, mainly in foreign partnerships, being denied the rights afforded by tax treaties.
However, in a recent ruling from the Administrative Court of Appeal in Gothenburg, the Tax Agency's reasoning was rejected. The case concerned whether the Swedish-Estonian tax treaty could be applied to a partner in an Estonian partnership. The Swedish Tax Agency argued that the treaty could not be applied because partnerships are not taxable entities, referring to HFD 2014 ref. 71 and preparatory works to other tax treaties than the Swedish-Estonian treaty, which contain explicit provisions regarding the applicability to partnerships.
The Administrative Court of Appeal in Gothenburg, in a ruling from late September 2014, explained that HFD 2014 ref. 71 did not apply to the situation at hand, as that case concerned a foreign partnership's tax liability under Swedish income tax law. Furthermore, the court clarified that the preparatory works cited by the Tax Agency were irrelevant since they did not pertain to the Sweden-Estonia tax treaty but to other tax treaties.
The Tax Agency's interpretation has now been overturned in Swedish case law. It remains to be seen whether the Tax Agency will appeal the ruling to a higher court.
Given this ruling, it should be possible for individuals to request a tax reassessment and potentially recover taxes, as it is now clarified that Swedish tax treaties should apply to partners in partnerships. Please contact us if you need assistance with this.
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