On 29 July 2024, the European Court of Justice rendered its ruling in the “KEVA case”. 
The Court ruled that Swedish legislation that imposes a withholding tax on dividends paid to non-resident public pension institutions while exempting resident public pension funds violates the principle of free movement of capital of article 63 TFEU.

Legal dispute

The case concerns the interpretation of Article 63 of the Treaty on the Functioning of the European Union (TFEU) regarding the free movement of capital. Specifically, it addresses whether Sweden’s taxation of dividends received by non-resident pension funds, while exempting resident pension funds from such taxes, constitutes a restriction on the free movement of capital. 

Background

The Finnish public pension funds received dividends from Swedish companies, which were subject to Swedish withholding tax. The Finnish funds, exempt from taxes on these dividends in Finland, argued that this differential treatment compared to Swedish public pension funds violated Article 63 TFEU. 

Legal framework

Article 63 TFEU prohibits restrictions on the free movement of capital between Member States. 

Article 65 TFEU allows some distinctions in tax law but prohibits arbitrary discrimination or disguised restrictions on capital movement. 

National Context 

Swedish law exempts resident public pension funds from tax on dividends but subjects non-resident public pension funds to withholding tax. 

Swedish resident pension funds are considered part of the State, avoiding a circular flow of public funds through tax exemptions. 

Comparability of Situations

Based on established CJEU case law, restrictions on the free movement of capital may be justified and allowed when situations are not objectively comparable. The CJEU approached the matter of objective comparability from several angles. 

Objective and Purpose of Tax Legislation

The Swedish legislation aims to avoid a circular flow of public funds by exempting resident public pension funds from withholding tax on dividends. This avoids unnecessary administrative complexity without economic benefit. That objective could also be achieved if non-resident pension institutions governed by public law were to benefit in Sweden from an exemption from withholding tax on dividends paid by resident companies in the same way as resident pension funds governed by public law. 

Direct Comparability

Both Swedish and Finnish pension funds serve similar social objectives, such as managing pension schemes, contributing to social security systems, and ensuring financial stability of old-age pensions. Despite organizational differences, their fundamental role in managing pension resources remains comparable. 

Legal and Operational Differences

While Swedish public pension funds are part of the State and Finnish funds have varying degrees of legal independence, this does not justify different tax treatments under the principle of free movement of capital. Finnish funds also collect contributions and pay pensions, but these functions do not directly relate to the tax treatment of dividends received from Swedish companies. 

The Court emphasizes that a non-resident pension fund operating under similar social objectives and financial mechanisms as a resident fund should not face a tax disadvantage solely based on its residence. Tax legislation should not arbitrarily discriminate against non-residents if their functional role and economic impact are comparable to that of residents. 

The Court’s Analysis

• Restriction on Capital Movement:
  The Court found that the Swedish tax law disadvantages non-resident pension funds, potentially deterring them from investing in Swedish companies, thus restricting the free movement of capital. 

• Justification of Restriction:
  The Court rejected Sweden's arguments that the tax exemption is justified by the need to safeguard social policy objectives or preserve a balanced allocation of taxing powers among Member States. 

Judgment 

The Court ruled that Article 63 TFEU precludes Swedish legislation that imposes a withholding tax on dividends paid to non-resident public pension institutions while exempting resident public pension funds from such a tax. This differential treatment constitutes a restriction on the free movement of capital. 

Conclusion 

The ruling emphasizes that Member States must ensure their tax laws do not create barriers to the free movement of capital within the EU by unfairly taxing non-resident entities compared to resident entities in similar situations. The Court follows the AG’s Opinion and concludes that non-resident public pension funds and resident public pension funds are in objectively comparable situations and should be treated equally under tax law to comply with EU principles. It is in line with and an elaboration of its ruling in the earlier College Pension Plan case.