A AB had deducted a termination fee paid to its affiliate, APO, as part of a restructuring in 2013.
The Swedish Tax Agency, found that this restructuring benefitted the group as a whole rather than A AB specifically, asserting that the costs related to this termination were not aligned with an arm’s length principle. The Agency noted that A AB’s payment of this fee reduced its taxable income in Sweden, while APO, which received the fee, was not subject to tax in Sweden.
In an appeal, A AB argued that the restructuring, which involved changing licensees within the corporate group, was commercially motivated to align its business model for future opportunities. The company also claimed the termination fee paid to APO was justified as it allowed the company to terminate an existing license and establish a new agreement, theoretically enhancing its future revenue prospects.
Judgment
The Court found in favor of the Swedish Tax Agency, stating that the termination was primarily part of a group-wide restructuring rather than a decision that independently benefited A AB. Given that A AB did not have sufficient resources to finance the termination fee independently (relying on a shareholder contribution from its parent company), and subsequently entered into a similar license agreement with another party under similar terms, the Court deemed that an independent party would not have incurred this expense under the same conditions. Consequently, the Court upheld the denial of the deduction for the termination fee, deeming it non-deductible under the Swedish’s arm’s length provision.
Click here for English translation
Click here for other translation