At issue was whether the acquisition value of an inventory acquired from a related company should be adjusted on the basis of Swedish arm’s length provisions or alternatively tax avoidance provisions
According to the arm’s length rule in Chapter 18, Section 11 of the Income Tax Act, the acquisition value is to be adjusted to a reasonable extent if the taxpayer or someone closely related to the taxpayer has taken steps to enable the taxpayer to obtain a higher acquisition value than appears reasonable and it can be assumed that this has been done in order to obtain an unjustified tax advantage for one of the taxpayer or someone closely related to the taxpayer.
Company (A) acquired a trademark from another company (B) in the same group for a price corresponding to its market value and used the acquisition value as the basis for depreciation deductions totalling approximately SEK 827 million. At B, the tax value of the trademark amounted to SEK 6 000 and B thus made a taxable capital gain. In connection with the transfer of the trademark, the shares in B were sold to a company in another group. Gains from the sale of shares was tax-free. In the group to which B belonged, the taxable capital gain on the trademark was set off against existing losses.
The tax authorities adjusted the acquisition value of the trademark to SEK 6 000 and refused company A a depreciations in excess of that amount. The reason given was that the intra-group transactions had resulted in the trademark being valued higher by A than by B, without any taxation of the difference within the group, and that this had resulted in A receiving an unjustified tax advantage. The Tax Agency imposed a tax surcharge.
Both the Administrative Court and the Court of Appeal rejected A’s appeals. In the Court of Appeal, the Tax Agency had, in the alternative, requested that the Tax Avoidance Act be applied to the proceedings.
Judgement of the Supreme Administrative Court
The Court set aside the Court of Appeal’s decisions on income tax and the tax surcharge and referred the cases back to Court of Appeal for consideration of the tax authorities alternative claim to apply the Tax Avoidance provisions to the proceedings.
The Court found that only two measures could be examined in detail when assessing whether arm’s length provisions applied to A’s acquisition of the trademark: B’s sale of the trademark to A and the parent company’s external sale of the shares in B. According to the Court the first measure resulted in the entire capital gain being taxed in B and that the fact that the purchase price exceeded the taxable value did not mean that the acquisition value did not appear reasonable. The second measure was unrelated to the acquisition of the trademark by A. There were therefore no grounds for applying the arm’s length rule.
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