European Commission urges Sweden to amend its dividend withholding tax on foreign pension funds


After the European Commission had formally requested Sweden to stop applying a higher dividend withholding tax to foreign pension institutions and insurance companies respectively in its February 2021 infringement package, the Commission has now decided to send a reasoned opinion (the next step in infringement proceedings) to Sweden regarding its taxation of dividends paid to public pension institutions. Whereas Swedish public pension funds are, as state agencies, entirely exempt from tax liability, including Swedish dividend withholding tax, dividends paid to comparable foreign public pension funds are subject to a withholding tax, commonly at a rate of 15% over gross dividend income. The 15% rate is the reduced rate that results from the double tax treaties concluded between Sweden and other EU/EEA countries. 

The European Commission takes the position that such a fiscal scheme under which dividends paid to foreign public pension funds are subject to less favourable treatment than similar distributions in purely domestic situations infringes the free movement of capital (Article 63 TFEU and Article 40 of the EEA Agreement). Sweden has two months to respond after which the Commission may decide to refer the case to the Court of Justice of the European Union. The European Court of Justice has already ruled in several cases that EU member states that levy a higher withholding tax from foreign pension funds, or that exempt their domestic pension funds while subjecting foreign pension funds to tax are violating the free movement of capital. Well known examples of such cases are the 2012 Commission vs Republic of Finland case (Case C-342/10), and the 2019 College Pension Plan case (Case 641/17)