This study addresses the question of the Swedish CFC (Controlled foreign corporation) legislations compatibility with the EC law, freedom of establishment and towards those double taxation agreements that Sweden have signed with other states.
The study is interesting and important for several reasons. There are two main ones. Fist of all; if the court in Luxemburg finds the CFC legislation not compatible with the freedom of establishment - the Swedish internal laws, in purpose of protecting tax avoidance by companies in tax havens, will suddenly be inoperative towards companies established inside the Union. Secondly; the same result will be a fact if the internal law is considered to be incompatible with the agreements that Sweden has signed with other states, in order to avoid double taxation.
If the legislation is incompatible with the EC law, the problem is quite big, but anyway limited to the 25 countries that today constitute the Union. No quick or simple solution is to be found. If it is not compatible with the agreements, the problem is greater - since Sweden have 70 complete agreements - though, a problem simpler to solve.
The purposes of the CFC legislation are to eliminate tax advantages of the shareholder when he transfers his earnings to a CFC corporation - or when he defers the taxation by postponing the dividend from the same corporation. Such postponement could otherwise be a fact, for all future.
If the level of taxation, in the foreign corporation is lower than 15.4 %, the incomes are considered to be a CFC income and are CFC taxed - if the owner holds 25 % control of the assets or votes of the corporation, directly or indirectly. The income is calculated according to Swedish rules for the same type of company and credit is given for taxes paid abroad.
The Swedish exchange control was abolished in 1992. The control restrained the possibilities to establish enterprises abroad by prohibiting the export of securities or other means of payment without the consent of the bank of Sweden. The abolishment of exchange controls has provided opportunities for tax avoidance. To prevent such avoidance, many countries have introduced legislations that tax shareholders directly - even though the profits from the foreign controlled companies not yet have been distributed.
Besides the restrains on foreign investments caused by the control, the CFC legislation was preceded by the less extensive “Luxemburg paragraph” - introduced in 1933. This paragraph has not much in common with today's legislation - the real means of preventing tax avoidance came with the CFC legislation 1990.
The last decades have seen much more of harmful tax competition, and both the EU and the OECD have come up with strategies to tackle these problems. In order to prevent the problems, the organisations suggest the member states to introduce some form of CFC legislation.
The first of July 2003 a new legislation came into effect, giving companies a right to bring back profits or earnings without taxation, if the companies are closely tied to each other or the possession of owning the company are due to dependence between them - when holding a kind of business related shares. Such rules were needed to avoid that some companies - or a combined groups of companies - would have to pay taxes three or four times for the same earnings.
With the possibility of bringing profits and earnings back to Sweden tax free, a new possible problem occurred. According to the government, there was a risk that a company based in Sweden choose to have a loan of money in Sweden, only in order to transfer the money to a tax haven. The result would be that the cost would appear in Sweden while the earnings would appear in a low tax regime. Later, whenever it would be suitable, the earnings - or the prof...
