Changes in the Application of Tax Treaties in Sweden

Abstract

In 2008, the Swedish Supreme Administrative Court gave precedence to controlled foreign corporation (CFC) legislation over a tax treaty without consulting the tax treaty. Since then, the relationship between domestic law and tax treaties has been a highly debated issue in Sweden. The Court's reasoning was based on an identified conflict between domestic law and a tax treaty, which was solved through reference to general principles on derogation. In a recent judgment in a similar situation, the same Court deviated in principle from the 2008 judgment by giving priority to the tax treaty over domestic law, thereby creating a welcome return to established principles of tax treaty application. Because the Court introduced a rule of exception from the rule that Swedish tax treaties prevail over domestic law, however, this recent decision introduces changes for the application of tax treaties in Sweden. In such situations, the main rule of tax treaty precedence over domestic law is set aside, and the principles of derogation will be applied. This article is divided into four sections, in which I examine and analyse the recent case and its implications for tax treaty application in Sweden. As the 2008 decision is of central importance, I briefly present this case in section 1. In section 2, I turn to the 2010 decision. Conclusions on the effects of the Court's adjudication on tax treaty application in Sweden are presented in section 3, in which I analyse the situations to which the rule of exception is applicable. A significant legal issue following the aftermath of the 2010 decision is presented in section 4.