Essity Treasury B.V. Holland operated in Sweden through a permanent establishment in the form of a Swedish branch. In the relevant years it also held shares in a Swedish subsidiary, and the acquisition of that subsidiary had been financed by intra group loans. The branch accounts showed the subsidiary shareholding as an asset and the acquisition loan as a liability, and the dispute concerned whether the interest expense on that acquisition financing could be attributed to the Swedish permanent establishment and therefore deducted in Sweden.
The tax authority denied deduction of the interest expense in Sweden. It relied on the authorised OECD approach for attributing profits to permanent establishments and argued that the economic ownership of the subsidiary shares and the related financing should be allocated to the part of the enterprise where the significant people functions are located, meaning the persons with authority to decide on acquisition, disposal and financing of the shares and to manage the related risks. Since it was not established that such decision making functions were located in the Swedish branch, the tax authority considered the shares could not be allocated to the branch and the interest could not be treated as attributable to the Swedish permanent establishment.
Essity Treasury argued that the interest expense should be attributed to the branch because the subsidiary’s operations were an integral part of the operations conducted through the branch and the shareholding should therefore be allocated there. It succeeded in the Administrative Court of Appeal, which held that the OECD profit attribution report did not address allocation of subsidiary shares and instead applied a domestic law approach focusing on whether the shareholding was conditioned by the branch’s activities. On that basis the Court of Appeal considered the branch and subsidiary activities sufficiently integrated for the shareholding to be allocated to the branch and sent the matter back for consideration of other deductibility requirements.
Judgment
The Supreme Administrative Court set aside the appealed part and remanded the cases.
It held that the Swedish rule on taxing income attributable to a permanent establishment is intended to enable Sweden to exercise treaty based taxing rights and should be interpreted dynamically in light of the current wording of the OECD Model and its commentary. It concluded that the profit attribution principles reflected in the OECD authorised approach, as described in the OECD profit attribution report, must guide the calculation of the income that is attributable to a permanent establishment under Swedish domestic law, including allocation of risks and economic ownership of assets through a functional and factual analysis identifying significant people functions. It expressly considered that this approach also applies to subsidiary shares, even if the report contains no special section on that asset type.
Because the Court of Appeal had not assessed whether the criteria for allocating the shares to the Swedish permanent establishment were met under the OECD based principles, the Supreme Administrative Court remanded the cases to the Court of Appeal for a new assessment applying that framework, and it awarded the company compensation for costs in the Supreme Administrative Court.
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