“X-IP AB” was part of an international group. In 2012 and 2013, a major restructuring was carried out within the group, including a decision to centralise and streamline the group’s management and development of intangible assets in Luxembourg. In 2012, the company registered a branch in Luxembourg, which was given responsibility for managing and developing the intangible assets held by the company. The branch employed staff with expertise in the field and the intangible assets were allocated to the branch at a book value of EUR 1. In the second half of 2013, a company was incorporated in Luxembourg (hereafter LUX). In September 2013, the branch transferred the intangible assets to LUX through a business disposal for a market consideration in the form of shares in LUX.
In its tax return for 2013, “X-IP AB” claimed a deduction of notional tax in Luxembourg of just over SEK 660 million, i.e. tax that would have been paid in Luxembourg if there had been no legislation there as referred to in the Merger Directive 2009/113/EC (cf. Chapter 38, Section 19 and Chapter 37, Section 30 of the Income Tax Act). The notional tax was calculated on the basis of the difference between the market value at the time of the sale to LUX and the book value, i.e. on the basis that Luxembourg would tax the entire profit.
The Swedish tax authorities decided not to allow a credit for the notional tax. They considered that the intangible assets were allocated to the permanent establishment in Luxembourg and that the conditions for allowing a deduction for fictitious tax existed to the extent that tax would have been payable in Luxembourg if the Merger Directive had not been implemented. However, the tax authorities were of the opinion that the company was not entitled to a credit for fictitious Luxembourg tax because there was no Luxembourg tax to credit. They considered that guidance should be taken from the OECD’s 2008 profit allocation report when interpreting the tax treaty between Sweden and Luxembourg. Since the intangible assets had been transferred from the company’s head office in Sweden to the branch office in Luxembourg and the branch office performed the relevant key functions regarding the intangible assets after the transfer, they considered that an internal transaction, a so-called dealing, corresponding to a sale of the assets had taken place from the company to the branch office. Accordingly, such a sale should have been made at market value to be arm’s length. The same market value should be used both at the time of allocation in December 2012 and at the time of transfer in September 2013, since no increase in value had occurred during the time the branch was the economic owner of the assets. The calculation of the capital gain on the branch’s sale of the assets was then SEK 0. The notional tax that would have been payable in Luxembourg if the provisions of the Merger Directive had not been implemented thus amounted to SEK 0.
An appeal was filed by “X-IP AB” that ended up in the Administrative Court of Appeal.
Judgment
The Court of Appeal found in favour of “X-IP AB”. It held that legal guidance in the interpretation of the tax treaty between Sweden and Luxembourg could be obtained from the OECD’s 2008 profit allocation report. The branch would thus be deemed to have acquired the intangible assets from the company at arm’s length through the allocation. The Administrative Court found that the arm’s length price was the same at the time of the allocation in December 2012 as at the time of the disposal in September 2013. According to the Administrative Court, there was thus no value for Luxembourg to tax and the company was consequently not entitled to a deduction of notional foreign tax.
According to the court internal Luxembourg law would have meant that a gain from the divestment would have been taxable in Luxembourg (but for legislation introduced as a result of the provisions of the Merger Directive) and that the internal taxing right was not limited by the tax treaty between Sweden and Luxembourg. The Administrative Court of Appeal held that what was known about the history and impact of the profit allocation report did not, in any event, mean that there were sufficient reasons to depart from the application of the tax treaty that followed from the tax assessment notice from the Luxembourg authority. According to the Court of Appeal, this meant that the tax treaty between Sweden and Luxembourg in this case should be applied in such a way that the input value of the intangible assets should be considered to be taxable values and that a profit thereby arose in Luxembourg at the time of the sale of the business in September 2013. The taxation of the profit was deemed to have been deferred in accordance with the Merger Directive. According to the Court of Appeal, there were thus conditions for applying Chapter 38, Section 19 and Chapter 37, Section 30 of the Income Tax Act and allowing a deduction for fictitious tax in the amount claimed by the company.
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