JUDGMENT OF THE SUPREME ADMINISTRATIVE COURT

Case no.

5264-5267-20 5269-20

delivered in Stockholm on 2 May 2022

COMPLAINTS

Swedish Match Intellectual Property AB, 556897-8802

Represented by: Anders Erasmie Mannheimer Swartling Advokatbyrå AB Box 1711

111 87 Stockholm

DEFENDANT

Skatteverket 171 94 Solna

APPEALED DECISION

Kammarrätten i Stockholms judgment of 25 August 2020 in case no. 4227-4231-19 and 1549-20

THE CASE

Income tax and tax surcharge

DECISION OF THE SUPREME ADMINISTRATIVE COURT

The Supreme Administrative Court annuls the decision of the Chamber Court in the parts relating to income tax and tax surcharge and remands the cases to the Chamber Court for reconsideration.

The Supreme Administrative Court awards Swedish Match Intellectual Property AB SEK 70 000 in costs in the Supreme Administrative Court.

BACKGROUND

1. Expenditure on the acquisition of inventory is to be deducted through annual depreciation deductions based on the acquisition value of the inventory. Chapter 18 of the Income Tax Act (1999:1229), IL, provides for this. Section 11 contains an adjustment rule whereby if the taxpayer or someone close to the taxpayer has taken steps to enable the taxpayer to credit a higher acquisition value than appears reasonable and it can be assumed that this has been done in order for one of them to obtain an unjustified tax advantage, the acquisition value must be adjusted to a reasonable extent.

2. Swedish Match Intellectual Property AB (the Company) was established in 2012 and is part of the Swedish Match Group. In 1999, another company in the group acquired a trademark for approximately SEK 670 million. Ten years later, the trademark was transferred within the group to Vinne 14 AB (Vinne) for SEK 6 000, which corresponded to the tax value of the trademark. In January 2013, the trademark was transferred again within the group, this time from Vinne to the Company for a purchase price of

approximately SEK 827 million. The purchase price was said to correspond to the market value of the brand and the transaction resulted in a taxable capital gain for Vinne of roughly the same amount. After the acquisition, the company credited the purchase price as the acquisition value of the brand.

In connection with the transfer of the brand, the parent company of the Swedish Match group sold the shares in Vinne, whose assets at the time consisted solely of cash and cash equivalents, to a holding company of another Swedish group for a purchase price of approximately SEK 757 million. The purchase price corresponded to the assets of Vinne less an amount equal to 9,2 % of the capital gain from the transfer of the brand. The shares in Vinne were business shares and the capital gain from their sale was therefore tax-free. Vinne was subsequently merged into the acquiring company, which in turn made group contributions to its parent company, which had previously had tax losses. Through this procedure, the taxable capital gain in Vinne was offset against these losses.

4. The company used the acquisition value of the trademark as the basis for annual depreciation deductions in its tax returns for the tax years 2013-2017.

5. By a decision of reassessment, the Tax Agency adjusted the acquisition value of the trade mark to SEK 6 000, which corresponded to the value of the trade mark at Vinne prior to the transfer, on the basis of the adjustment rule in Chapter 18, Section 11 of the Income Tax Code, and thus refused the company depreciation deductions in excess of that amount. The reason given was that the transactions that had taken place within the Swedish Match group had resulted in the trade mark being valued more highly by the company than by Vinne, without this leading to any taxation of the difference within the group, and that this meant that the company had received an unjustified tax advantage. The Tax Agency also decided to levy a tax surcharge for the tax years 2013 to 2016.

6. The company appealed the decisions to the Administrative Court in Stockholm, which rejected the appeals.

7. The company appealed to the Administrative Court of Appeal in Stockholm, where the Tax Agency contested the amendment, primarily on the basis of the arm’s length rule in Chapter 18, Section 11 of the Income Tax Act and, secondarily, on the basis of the Act (1995:575) against tax evasion.

8. The Kammarrätten dismissed the appeals on the basis of the arm’s length rule. According to the Court of Appeal, the transactions carried out within the Swedish Match group and those carried out after the external transfer of Vinne had combined in an arrangement which meant that the Swedish Match group obtained a new, substantially higher acquisition value for the trade mark without the tax cost of this being borne by the group. The Court of Appeal held that the company and its affiliated companies had taken steps to enable the company to obtain a higher acquisition value than appeared reasonable and that the purpose was for the company to obtain an unjustified tax advantage.

9. The Administrative Court and the Court of Appeal rejected the company's claims for reimbursement of costs in the cases, but these claims are not subject to review by the Supreme Administrative Court.

THE APPLICATION M.M.

10. Swedish Match Intellectual Property AB requests that it be granted depreciation deductions in accordance with the declarations submitted and that it be awarded compensation for costs in the Supreme Administrative Court in the amount of SEK 122 060 and submits as follows. The arm’s length rule cannot be applied to transactions which have taken place at market value. No definitive tax benefit has arisen because the losses set off against the capital gain in Vinne have been consumed by the set-off, which means that the cash tax payment has merely been postponed. The set-off rule is not intended to prevent undesirable loss relief between groups, but this is dealt with within the framework of Chapter 40. IL on the deduction of prior years' losses following changes in ownership.

11. The Tax Agency considers that the appeal should be dismissed, primarily on the basis of the adjustment rule and secondarily on the basis of the Tax Evasion Act. The Authority supports the granting of SEK 70 000 in compensation for costs incurred by the company in the Supreme Administrative Court.

REASONS FOR THE DECISION

The issue in the cases

12. The issue in the cases is under which conditions the acquisition value of an inventory acquired from a company close to the taxpayer should be adjusted on the basis of the adjustment rule in Chapter 18, Section 11 of the Income Tax Act.

The Supreme Administrative Court's assessment

Tax issue

13. In order for the adjustment rule in Chapter 18, Section 11 of the Income Tax Act to apply, it is first of all necessary that the taxpayer or someone close to the taxpayer has taken steps to enable the taxpayer to credit a higher acquisition value than appears to be reasonable. The provision was originally introduced in 1938 and the background was that a transferor could avoid tax or be taxed lightly under the capital gains rules of that time while the transferee received a high depreciation base (prop. 1999/00:2 part 2 p. 236, cf. also RÅ 1994 ref. 44 and RÅ 1993 ref. 83 II).

14. The company acquired the trade mark from Vinne, which was then part of the same group as the company, for an amount which far exceeded the tax value of the trade mark to Vinne. The purchase price was stated by the company to correspond to the market value of the trade mark, and the Tax Agency did not challenge that statement. Vinne's taxable capital gain from the sale was substantially the same as the amount it had paid for the trade mark and which it used as the basis for the depreciation deduction. Immediately after the acquisition of the brand by the company, the shares in Vinne were sold externally and Vinne ceased to be related to the company. Within the group to which Vinne subsequently belonged, the capital gain was set off against previous years' losses.

15. It follows from the wording of the law that measures taken by Vinne, or by any other company in the group to which Vinne then belonged, after Vinne had left the Swedish Match group cannot be taken into account in determining whether the adjustment rule applies to the company's acquisition of the trade mark. Furthermore, it follows that the measures to which the rule applies must have been intended to increase the acquisition value beyond what appears reasonable; there must be a link between the measures and the increased acquisition value.

16. In the present case, therefore, there are two measures which may be examined in detail, namely the sale of the brand name by Vinne to the company and the external sale by the parent company of its shares in Vinne.

17. The first measure led directly to an acquisition value for the company of approximately SEK 827 million. However, the sale took place at market value and resulted in the entire capital gain being taxed by Vinne (see RÅ 1993 ref. 83 II). The fact that the purchase price exceeded the taxable value of the trade mark at Vinne does not mean that the acquisition value does not appear to be reasonable. The second measure is unrelated to the company's acquisition of the trade mark and cannot therefore be said to have been taken 'in order for' the company to be able to credit itself with a higher acquisition value than appears to be reasonable.

18. It follows from the foregoing that there are no grounds for adjusting the company's acquisition value on the basis of the adjustment rule in Chapter 18, Section 11 of the Income Tax Code and the decision of the Court of Appeal must therefore be set aside in so far as it relates to income tax and the tax surcharge.

19. In the alternative, the Tax Agency has requested that the Tax Evasion Act be applied to the proceedings. This question should not be examined by the Supreme Administrative Court in the first instance, but the cases should be referred back to the Administrative Court of Appeal for reconsideration.

Reimbursement of costs

20. The company has succeeded in its action and the cases concern a matter of importance for the application of the law. The company is therefore entitled to reimbursement of the costs of representation before the Supreme Administrative Court that it reasonably needed to assert its rights.

21. The company has submitted a statement of costs for fees for 35 hours of work carried out mainly by a lawyer and a paralegal. However, it does not indicate the time spent on the various activities or the division of labour between the lawyer and the paralegal. It is therefore not possible to determine the hourly cost of the work carried out by each of them, nor to assess whether the time spent and the average hourly cost are reasonable. Due to these shortcomings, an overall fairness assessment of the entire work performed must be made (cf. HFD 2019 ref. 16, paragraphs 27 and 28). In view of the scope and content of the correspondence in the cases, the Supreme Administrative Court finds that reasonable compensation should be set at SEK 70,000.

Henrik Jermsten, Margit Knutsson (dissenting), Per Classon, Inga-Lill Askersjö (dissenting) and Linda Haggren (dissenting), Judges, participated in the decision.

The rapporteur was Mr Jack Hillerström-Forsyth, Registrar.

SKILJAKTIGA

Ms Margit Knutsson, Judicial Counsellor, dissenting from the handling of the Tax Agency's application in the alternative, considers that there is no reason to refer the cases back to the Court of Appeal and that paragraph 19 should have been worded as follows.

19. In the alternative, the Swedish Tax Agency has requested that the Tax Evasion Act be applied to the proceedings. A prerequisite for the application of that Act is that the procedure has resulted in a substantial tax benefit not intended by the legislature for the taxpayer (Section 2(1) and HFD 2021 ref. 33, paragraph 25), i.e. in this case the company. It follows from the above that there are no grounds for adjusting the company's acquisition value on the basis of the adjustment rule, which means that the acquisition value used by the company as the basis for the depreciation deduction is reasonable. Deductions based on such a basis cannot be said to result in an unintended tax benefit. It follows that the Tax Avoidance Act does not apply.

Judges Inga-Lill Askersjö and Linda Haggren disagree on the applicability of the adjustment rule in Chapter 18, Section 11 of the Income Tax Act (paragraphs 13-18) and state the following.

1. The arm’s length rule was originally introduced in 1938 and the purpose of the provision was to prevent abuse. The background to the rule was that a transferor could avoid tax or be taxed lightly under the capital gains rules of the time while the transferee received a high depreciation base. The preparatory work shows that it was difficult to foresee the various forms of abuse that could take place, which is why the provision was worded in general terms. However, it was also stated that the provision was intended to have a purely prohibitive effect and that its application in practice could therefore be expected to be rarer (SOU 1937:42 p. 241).

2. The legislator has on a few occasions expressly taken a position on whether the provision should be retained (see Prop. 1989/90:110 part 1 p. 558 and Prop. 1999/2000:2 part 2 p. 236). When the Income Tax Act was enacted, the legislator stated that even if the reasons underlying the provision had weakened, there might be cases where a rule of arm’s length was still justified.

3. However, the capital gains rules for companies have subsequently become more favourable. On 1 July 2003, the taxation of capital gains on business shares was abolished (prop. 2002/03:96). In that context, however, the arm’s length rule was not specifically addressed.

4. Originally, one and the same adjustment rule applied to both real estate and inventories, but a 1981 amendment to the law introduced two identical paragraphs. In the case of immovable property, the provision is contained in Chapter 19(14)(a) of the Income Tax Code. In view of the fact that capital gains on immovable property were not fully taxed for a long time, the arm’s length rule was applied above all to disposals of such assets.

5. For the adjustment rule in Chapter 18, Section 11 of the Income Tax Code to apply, the taxpayer or someone close to the taxpayer must have taken steps to enable the taxpayer to credit himself with a higher acquisition value than appears to be reasonable.

6. The company acquired the trade mark in January 2013 from Vinne for SEK 827 million, which far exceeded the original acquisition value and the value at which the inventory was recorded in Vinne's accounts. The tax value of the trademark at Vinne at the time of the transfer was SEK 6 000.

7. The case law in RÅ 1998, note 234, shows that the adjustment rule must be limited to transactions of an abusive nature. A sale of inventory at a price exceeding the original acquisition value or the value at which the inventory is recorded in the transferor's accounts was not considered sufficient to constitute a transaction of an abusive nature. The disposal of a branch of activity at a price not exceeding the market value was not considered to be such a transaction.

8. Thus, as stated in RÅ 1998, note 234, the transfer of the trade mark from Vinne to the company cannot, in isolation, be regarded as constituting an abusive transaction of the kind required for the application of the rule on arm’s length.

9. The question is then whether the company or someone close to it has taken other steps - apart from the transfer of the trade mark - in order to enable the company to be credited with a higher acquisition value than appears reasonable.

10. Vinnes' taxable capital gain resulting from the assignment amounted to substantially the same amount that the company had paid for the trademark and that the company used as the basis for the depreciation deduction. However, the day after the transfer, Vinne - which at the time contained only cash and the untaxed capital gain - was sold to an outside buyer. The price for Vinne was set at the value of the assets less an amount of 9,2 % of the capital gain. The sale of the shares in Vinne, which were held by the parent company, resulted in a tax-free capital gain for the parent company.

11. The entire procedure - the transfer of the brand to the company and the sale of Vinne, as well as the depreciation of the brand over the following five years - is described in detail in a protocol of the Board of Directors of the parent company from December 2012. The protocol states that the taxable gain amounts to SEK 112 million, calculated as the tax value of the depreciation less the compensation to the external buyer. The fact that the sale of Vinne resulted in a tax-free capital gain for the parent company under the rules on business shares therefore appears to be a precondition for the brand to be transferred to the company at a price exceeding the tax value of Vinne.

12. The transfer of the trade mark and the sale of Vinne combined - in our view - the depreciation rules and the rules on tax exemption for business shares in a way which may be regarded as constituting an abuse of the kind to which the arm’s length rule is intended to apply. The measures taken have enabled the company to credit itself with a higher acquisition value than appears reasonable. The way in which Vinne was taxed after it left the group has no bearing on the application of the adjustment rule to the company's depreciation base.

13. A further requirement for the application of the adjustment rule in Chapter 18, Section 11 of the Income Tax Code is that it can be assumed that the measures taken were taken in order to obtain an unjustified tax advantage for one of the companies involved.

14. The company has stated that the reason for the transfer of the trademark was that the group wanted to group its foreign trademarks in a separate company, inter alia, in order to facilitate a possible sale process. However, this cannot justify the pricing of the transfer of the trademark or the sale of Vinne. The minutes of the board of directors also show that another reason for the measures was the tax gain. It can therefore be assumed that the primary reason for taking the measures was that the company would receive such an unjustified tax advantage as is required for the adjustment rule to apply.

15. Overall, we consider that the conditions for applying the adjustment rule in Chapter 18, Section 11 of the Income Tax Act are met. Overruled on this issue, we share the majority's assessment on the Tax Evasion Act and the reimbursement of costs in the Supreme Administrative Court.