There is a tax convention between the Nordic countries which includes, inter alia, provisions according to which transactions between associated companies in different countries may be taxed on the basis of the so-called arm’s length principle, i.e. as though the companies were independent of one another.
Article 9.2 of the tax convention stipulates that where another country, in accordance with the arm’s length principle, taxes an income for which a company is also taxed in Sweden, Sweden shall perform a so-called corresponding adjustment of the tax. Such an adjustment shall be made only if Sweden is of the view that the adjustment is justified. In conjunction with the adjustment, the Swedish Tax Agency, in its capacity as competent authority, may if necessary consult the competent authority of the other country.
The case concerns a Swedish company that has had interest income from a Norwegian subsidiary company. Norwegian authorities have, by application of the arm’s length principle, denied the subsidiary company a deduction for parts of the interest expenses. The Swedish Tax Agency subsequently denied the Swedish company a corresponding adjustment of interest income on the grounds that it was not considered justified. However, following an appeal, the Administrative Court of Appeal found that a court is prevented from applying Article 9.2.
The Supreme Administrative Court noted that, in its taxation activities, the Swedish Tax Agency shall apply provisions in the tax conventions, including Article 9.2. Following an appeal of a tax decision, the administrative courts shall also apply such provisions. If, when assessing Article 9.2, the Swedish Tax Agency is of the opinion that the conditions for corresponding adjustment are not fulfilled and the decision of the agency is appealed, it is incumbent upon the administrative courts to examine whether the Swedish Tax Agency has grounds for its decision. The fact that the Swedish Tax Agency in its capacity as competent authority can initiate consultations with another country does not mean that an administrative court is prevented from making a corresponding adjustment in accordance with Article 9.2.