Swedish tax rules on share repurchase contrary to EC Treaty
The ECJ has delivered its decision in case C-265/04 Bouanich. The ruling is a legal precedent in all EU member states.
Mrs Bouanich, a French resident, held shares in a Swedish company. When the company repurchased shares from its shareholders Sweden withdrew a withholding tax of 30% on the amount paid to non-residents. In case of Mrs Bouanich the tax rate was reduced to 15% according to provisions in the Swedish-French tax treaty.
According to Swedish rules repurchase of shares constitutes a taxable event whereon the Swedish residents are taxed for capital gain after deduction for costs and expenses whereas the same amount paid out to non-residents is treated as dividends, with no right to costs deductions.
The question referred to the ECJ was whether this differential tax treatment of resident and non-resident shareholders, resulting partly from Swedish domestic law and partly from the application of the double tax treaty between France and Sweden, was compatible with the provisions of the EC Treaty.
The ECJ argued that the right to deduct the acquisition costs of shares constitutes a tax advantage, which is preserved solely to resident shareholders. In court’s view the effect of Swedish rules is that it is less attractive for investors to make cross-border transfers of capital such as buying shares in companies resident in Sweden. Consequently, the opportunities available to Swedish companies to raise capital from non-resident investors are restricted.
The ECJ found therefore that the differential treatment of non-resident and resident shareholders in the case of a repurchase of shares constitutes a restriction on the movement of capital within the meaning of Article 56 EC Treaty.
As to the possible grounds of justification, the ECJ found that, as the cost of acquisition of the shares is directly linked to the payments made in respect of their repurchase, there is no objective difference between the situations of resident and non-resident taxpayers when receiving such income. Consequently, the court found that the Swedish legislation was discriminatory to non-resident shareholders in as far as it imposed a higher tax burden compared to resident shareholders.
The ECJ examined also whether the tax treaty should be considered when examining the domestic legislation. The ECJ made the general statement that the tax treaty must be taken into account when interpreting Community Law since the tax treaty forms part of the legal background in the main proceedings. The court argued that the national legislation which derives from a tax treaty would only be compatible with the free movement of capital if the treatment of the non-resident shareholder as set out by the treaty is not less favourable than the treatment of a resident shareholder. The determination of whether the non-residents shareholders benefit from an equal treatment or suffer a disadvantage is the task of the national court. In so far the tax treaty does not result in an equal treatment it shall be set aside. Read full text.
