Swedish Supreme Court Empowers Taxpayers in Cross-Border Transfer Pricing Disputes

This landmark judgment not only strengthens the legal standing of taxpayers facing economic double taxation but also introduces a more transparent and potentially faster alternative to the often opaque and protracted MAP process. By recognizing the courts’ authority to interpret and apply treaty provisions, the decision marks a significant step forward in ensuring judicial protection in cross-border tax matters—an issue of growing importance in today’s globalized economy.

A Landmark Ruling on Judicial Review of Treaty-Based Transfer Pricing Adjustments

On November 25, 2024, the Swedish Supreme Administrative Court (Högsta förvaltningsdomstolen) delivered a landmark judgment in the case of Played Holding AB v. Skatteverket, under case numbers 1348-24 and 1349-24. The Court ruled that Swedish administrative courts have jurisdiction to review and apply Article 9.2 of tax treaties in cases involving corresponding transfer pricing adjustments. This decision clarifies that such matters are not exclusively within the domain of competent authorities acting through the Mutual Agreement Procedure (MAP), thereby significantly enhancing taxpayers’ rights to judicial remedies in cross-border tax disputes. The ruling offers a potentially faster and more transparent alternative to the often lengthy and opaque MAP process.

Background

The dispute arose from a cross-border intra-group financing arrangement. Played Holding AB, a Swedish parent company, had extended loans to its Norwegian subsidiary and received interest payments, which were fully taxed in Sweden. However, the Norwegian tax authorities denied a portion of the interest deduction claimed by the subsidiary, arguing that the interest rate exceeded what would be considered arm’s length under transfer pricing principles.

This created a situation of economic double taxation. The same income was taxed in Sweden as interest income and again in Norway through the disallowance of the deduction. To address this, Played Holding AB requested that the Swedish Tax Agency (Skatteverket) make a corresponding adjustment under Article 9.2 of the Nordic Tax Treaty. The company argued that the portion of interest income disallowed in Norway should be excluded from taxation in Sweden. Article 9.2, which mirrors the OECD Model Tax Convention, provides for such adjustments when the primary adjustment is justified both in principle and in amount.

Procedural History

Skatteverket initially rejected the request, asserting that the Norwegian adjustment was not consistent with the arm’s length principle. Played Holding appealed this decision to the Administrative Court (Förvaltningsrätten), which ruled in the company’s favor and granted the corresponding adjustment. Skatteverket then appealed to the Administrative Court of Appeal (Kammarrätten), which reversed the lower court’s decision. The Court of Appeal held that administrative courts lacked jurisdiction to apply Article 9.2 of the Nordic Tax Treaty and that such adjustments should be determined exclusively through MAP between the competent authorities of the contracting states. Played Holding subsequently appealed to the Supreme Administrative Court.

Legal Issue

The central legal issue before the Supreme Administrative Court was whether Swedish administrative courts have the authority to apply Article 9.2 of the Nordic Tax Treaty in determining whether a taxpayer is entitled to a corresponding adjustment following a foreign transfer pricing adjustment. This question raised broader concerns about the relationship between international tax treaties and domestic law, the role of courts in applying treaty provisions, and the extent to which taxpayers can access judicial remedies in international tax matters.

Treaty Provision at Stake

Article 9.2 of the Nordic Tax Treaty, consistent with the OECD Model Tax Convention, provides that when one contracting state adjusts a company’s income for transfer pricing reasons, the other state shall make a corresponding adjustment to avoid double taxation, provided the adjustment is justified both in principle and in amount. The provision also states that the competent authorities of the contracting states shall consult each other if necessary. In Sweden, Skatteverket is designated as the competent authority.

The Supreme Court’s Decision

The Supreme Administrative Court overturned the decision of the Court of Appeal. It held that Sweden is bound by the Nordic Tax Treaty under international law, and that the treaty has been incorporated into Swedish domestic law with precedence over conflicting internal tax provisions. The Court emphasized that both Skatteverket and the administrative courts are required to apply all provisions of tax treaties, including Article 9.2. If Skatteverket denies a corresponding adjustment and the decision is appealed, the courts have full jurisdiction to review whether such an adjustment should be granted. The Court clarified that the reference in Article 9.2 to consultations between competent authorities does not exclude the courts’ jurisdiction to review these matters. Consequently, the case was remanded to the Court of Appeal for a substantive review of whether the Norwegian adjustment was justified and whether a corresponding adjustment should be made in Sweden.

Significance of the Ruling

This decision has far-reaching implications for both taxpayers and tax authorities. It significantly enhances taxpayers’ rights by confirming their ability to seek judicial review of transfer pricing adjustments under tax treaties. This provides an important alternative to the MAP process, which is often protracted and lacks transparency. Although the case specifically concerned the Nordic Tax Treaty, the Supreme Administrative Court noted that the ruling would likely apply to most tax treaties Sweden has concluded with other states, as these treaties typically contain provisions similar to Article 9.2 of the OECD Model Tax Convention.

By establishing a clearer pathway for relief, the decision may lead to more effective resolution of economic double taxation arising from transfer pricing adjustments. This is particularly important given that transfer pricing disputes are among the most common issues addressed through MAP, according to OECD statistics. The ruling also contributes to the relatively limited body of judicial decisions on the interpretation and application of Article 9 of tax treaties, offering valuable insights into how domestic courts can address treaty-based transfer pricing issues. It may influence judicial approaches in other jurisdictions facing similar questions.

Conclusion

The Played Holding AB v. Skatteverket decision represents a significant development in international tax jurisprudence. By confirming that domestic courts can review and apply Article 9.2 of tax treaties, the Swedish Supreme Administrative Court has reinforced the principle that taxpayers are entitled to judicial protection against economic double taxation. While MAP procedures remain an important mechanism for resolving cross-border tax disputes, this ruling ensures that taxpayers also have access to domestic judicial remedies when seeking corresponding adjustments under tax treaties. As international tax disputes continue to grow in complexity and frequency, this decision provides welcome clarity on the role of domestic courts in applying treaty provisions designed to prevent double taxation.