The Territorial Limitation of the Swedish Wage Remuneration Rule for Closely Held Companies in light of EU- and Domestic Tax Law on Third Country Inbound Dividends

Abstract: The Swedish rules for closely held companies were enacted to combat income conversion abuse in limited liability companies where natural persons acted as both owners and employees. In the Swedish Income Tax Act, employment income is taxed according to a progressive rate while capital income is taxed according to a flat rate. The wage remuneration rule may increase the amount of dividend that the active owner is allowed to tax according to the flat capital tax rate. However, it only allows for the inclusion of wages paid inside the territories of the EU and EEA. Dividends originating in third states will be more heavily taxed. This contribution provides a review of the territorial limitation of the Swedish wage remuneration rule in light of the settled case-law of the Court of Justice of the European Union on the matter of inbound dividend taxation. Additionally, it provides a review of the territorial limitation with consideration to its domestic context, purpose and effect. It is concluded that the Court of Justice of the European Union has not substantially changed its disposition regarding domestic legislation exclusively targeting holdings of definite influence. Furthermore, the wage remuneration rule is very likely to exclusively target such holdings. Due to the Court’s reluctance of applying the free movement of capital under such circumstances, no EU law remedy is concluded to exist for the different tax treatment created between a domestic holding and a third country holding. As regards the domestic context, the territorial limitation is considered to not be in line with capital export neutrality. This divergence can only be understood by the need to ensure effective fiscal supervision. Such a justification is in EU law only accepted if it proves untenable to obtain the necessary information. It may, therefore, be prudent for the Swedish legislator to review whether the territorial limitation goes beyond what is necessary to achieve this objective.