New WHT Exception for Foreign States Proposed in the Swedish Withholding Tax Act

Background

Under current Swedish law, withholding tax (Sw. kupongskatt) is levied at a rate of 30% on dividends and should be withheld at the time of distribution. The liability to pay withholding tax on dividends applies as a main rule to individuals, estates of deceased persons, and foreign legal entities, provided that the dividend is not attributable to income from business activities conducted through a permanent establishment in Sweden. There are several exemptions under domestic law, i.e. the Swedish Withholding Tax Act, to the liability to pay withholding taxes and exemptions can also be based on a double tax treaty. The withholding tax can, when certain criteria are fulfilled, be fully or partly reclaimed or directly deducted - depending on the tax treaty between Sweden and the receiving entity's home state. 

In December 2024, the CJEU, and subsequently the Swedish Supreme Administrative Court ruled that the current withholding tax regime violates the EU principle for freedom of movement of capital. The CJEU found it discriminatory to impose withholding tax on dividends paid to Finnish public pension institutions while exempting Swedish public pension funds from tax. The CJEU confirmed that such differential treatment constitutes a restriction on capital movement and is not justified by overriding public interest.

Amendment to the Swedish Withholding Tax Act

The government bill, proposed to take effect on 1 July 2026, introduces an explicit exemption from withholding tax for:

• Foreign states located within the European Economic Area (EEA), or those having entered into a tax treaty which contains an article on information exchange, or information exchange agreement with Sweden.
• Foreign equivalents of Swedish regions, municipalities, or municipal associations, provided they are domiciled in such states mentioned above.

This amendment means that dividends paid from Swedish entities to these foreign public entities, which according to the current Swedish Withholding Tax Act would be taxable, should be exempt from Swedish withholding tax.

The tax-exempt status of Swedish public entities still stands after the amendment since they are considered part of the state and therefore not subject to Corporate Income Tax (CIT). Instead, the amendment aligns the tax treatment of foreign public bodies with that of domestic ones, thereby addressing the legal concerns raised by the CJEU.

Non-Public Pension Institutions

The ruling from the CJEU and the government bill address public pension institutions that are part of, or equivalent to, foreign states or local government entities. Private or non-public pension institutions are not included in the proposed exemption. 

It is described in the legislative bill that under current rules, Swedish non-public pension institutions (Sw. pensionsstiftelser) are generally not subject to CIT, instead they are subject to a yield tax (Sw. avkastningsskatt). The Swedish Supreme Administrative Court has previously in HFD 2017 ref. 9 I asked for an advance ruling from the CJEU in case number C-252/14 Pensioenfonds Metaal en Techniek v. Skatteverket. The legislative bill describes that the Swedish Supreme Administrative Court found that it does not constitute a restriction on the free movement of capital that Swedish non-public pension funds are taxed with yield tax while foreign non-public pension funds are taxed with withholding tax. Based on this, it is stated in the government bill that it is therefore not considered necessary to amend the law concerning foreign non-public pension funds. As such, we do not expect changes to the tax treatment of foreign private or non-public pension institutions.

Comparability analysis

According to the proposed government bill, assessing foreign equivalents under the proposed amendment generally poses no significant difficulties when the recipient is a foreign state, region, municipality, or municipal federation. However, the bill mentions that it is uncommon for a foreign state itself to directly own shares in Swedish companies or units in Swedish funds. Instead, public authorities or other public-law entities that form part of a foreign state may engage in capital management as part of their operations, such as the Finnish public pension institutions referenced in the 2024 cases (HFD 2024 ref. 63, HFD 2024 not. 73 and HFD 2024 not. 74).

The preparatory works for the Swedish Income Tax Act provide general principles for evaluating foreign equivalents, which also guide assessments under the Swedish Withholding Tax Act. Comparisons should be made from both Swedish and foreign perspectives, recognizing that absolute identity is not required. Instead, it must be determined on a case-by-case basis whether the similarities are sufficient for the foreign entity to be considered equivalent to the Swedish term.

The Swedish Bar Association did in the circulation for comments prior to the government bill request a clearer guidance on when a foreign entity can be regarded as equivalent to a tax-exempt Swedish public-law entity, suggesting criteria such as function, purpose, financing, or legal structure, and whether actual similarity is required beyond formal identity. The government, however, cautions that establishing such fixed criteria risks conflicting with EU law. Therefore, it concludes that the determination of relevant criteria in individual cases should be left to judicial interpretation.

Implementation and Refunds

The amendment would apply to dividends where the payment date is after 1 July 2026. However, due to the prior CJEU rulings from 2024, foreign public pension funds which fulfill the prerequisites of similarity with Swedish public pension funds, who have paid withholding tax on dividends from investments in Swedish entities should have the possibility to reclaim full refunds based on EU law for the previous five years, meaning dividends paid from 2021 and onwards up until 2026 if a reclaim is filed in 2026.

The government bill has been submitted to the Swedish Parliament for approval. If approved by the Parliament, foreign states and their equivalents to Swedish regions, municipalities, or municipal associations receiving dividends from Swedish entities should assess if they are covered by the exemption and investigate options to claim reimbursement or, when accepted by e.g. the custodian, seek the possibility to be granted relief at source. 

How Deloitte Can Assist

Deloitte is well equipped to support you in understanding and implementing the changes arising from this amendment. We are happy to assist with the following:

• Assessing the impact of the amendment on your organisation's withholding tax obligations.
• Advising on the qualification criteria for foreign entities to benefit from the exemption.
• Preparing and filing refund claims to the Swedish Tax Agency related to withholding tax paid on dividends between 2021 to 2026 if a reclaim is filed 2026.

We welcome questions and are happy to help you assess the potential impact of the ruling and the following government bill. 

Authors: Karoliina Joas, Rebecka Mannila, Noa Andersson