Provisional text
JUDGMENT OF THE COURT (First Chamber)
29 July 2024 (*)
(Reference for a preliminary ruling – Article 63 TFEU – Free movement of capital – Taxation of dividends received by pension funds governed by public law – Difference in treatment between resident and non-resident pension funds governed by public law – Exemption only of resident pension funds governed by public law – Comparability of situations – Whether justified – Need to safeguard the objective pursued by social policy – Need to preserve a balanced allocation of the power of taxation of the Member States)
In Case C‑39/23,
REQUEST for a preliminary ruling under Article 267 TFEU from the Högsta förvaltningsdomstolen (Supreme Administrative Court, Sweden), made by decision of 24 January 2023, received at the Court on 26 January 2023, in the proceedings
Keva,
Landskapet Ålands pensionsfond,
Kyrkans Centralfond
v
Skatteverket,
THE COURT (First Chamber),
composed of A. Arabadjiev, President of the Chamber, T. von Danwitz, P.G. Xuereb (Rapporteur), A. Kumin and I. Ziemele, Judges,
Advocate General: A.M. Collins,
Registrar: A. Lamote, Administrator,
having regard to the written procedure and further to the hearing on 11 January 2024,
after considering the observations submitted on behalf of:
– Keva, Landskapet Ålands pensionsfond and Kyrkans Centralfond, by K. Äimä and K. Grüssner,
– Skatteverket, by K. Hjelmberg and U. Vretendahl,
– the Swedish Government, by C. Meyer-Seitz and R. Shahsavan Eriksson, acting as Agents,
– the Spanish Government, by A. Pérez-Zurita Gutiérrez, acting as Agent,
– the European Commission, by P. Carlin, A. Ferrand and W. Roels, acting as Agents,
after hearing the Opinion of the Advocate General at the sitting on 21 March 2024,
gives the following
Judgment
1 This request for a preliminary ruling concerns the interpretation of Article 63 TFEU.
2 The request has been made in proceedings between, on the one hand, Keva, the Landskapet Ålands pensionsfond (pension fund of the province of Åland, Finland) and the Kyrkans Centralfond (Central Church Fund, Finland), three pension funds governed by public law established under the Finnish occupational pension scheme, and, on the other, Skatteverket (the Swedish tax agency) concerning the tax treatment in Sweden of dividends distributed by Swedish companies to the applicants in the main proceedings.
Legal context
International law
OECD Model Tax Convention
3 On 30 July 1963 the Council of the Organisation for Economic Co-operation and Development (OECD) adopted a recommendation concerning the avoidance of double taxation and called on the governments of the member countries, when concluding or revising bilateral conventions, to conform to a ‘Model convention for the avoidance of double taxation with respect to taxes on income and capital’ that had been drawn up by the Fiscal Committee of the OECD and was annexed to that recommendation (‘the OECD Model Tax Convention’). That model tax convention is re-examined and amended regularly. It is the subject of commentaries approved by the OECD Council.
4 Article 24 of the OECD Model Tax Convention, entitled ‘Non-discrimination’, provides, in paragraph 1 thereof:
‘Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. …’
5 Point 10 of the Commentary on Article 24 of the OECD Model Tax Convention states:
‘… the provisions of paragraph 1 [of that Article 24] are not to be construed as obliging a State which accords special taxation privileges to its own public bodies or services as such, to extend the same privileges to the public bodies and services of the other State’.
6 Point 12 of that commentary provides:
‘… if a State accords immunity from taxation to its own public bodies and services, this is justified because such bodies and services are integral parts of the State and at no time can their circumstances be comparable to those of the public bodies and services of the other State. …’
The Nordic Tax Convention
7 Under Article 10(3) of the convention between the Nordic countries for the avoidance of double taxation with respect to taxes on income and on capital, signed in Helsinki on 23 September 1996 (‘the Nordic Tax Convention’), dividends paid by a company resident in a Contracting State to a person resident in another Contracting State are also taxable in the Contracting State in which the company paying the dividends is resident. If the beneficial owner of the dividend is a resident of the other Contracting State, the tax charged may not exceed 15% of the gross amount of the dividend.
8 Article 25 of the Nordic Tax Convention provides methods for avoiding double taxation. As regards persons resident in Finland, it is provided that those persons are, as a general rule, entitled to deduct from Finnish income tax an amount equal to the income tax paid under the legislation of another Contracting State and in accordance with that convention.
Swedish law
9 Under the first subparagraph of Paragraph 1 of the kupongskattelagen (1970:624) (Law (1970:624) on the taxation of dividends), the tax on dividends must, as a general rule, be paid to the State for any distribution of dividends from shares in Swedish public limited companies.
10 Under the first subparagraph of Paragraph 4 of that law, foreign legal persons who are entitled to dividends are liable to pay that tax if the dividends paid do not relate to income from an economic or commercial activity carried on through a permanent establishment in Sweden.
11 Paragraph 5 of that law provides that the tax on dividends is to be levied at the rate of 30% of the dividends distributed. However, it is apparent from the first subparagraph of Paragraph 27 of that law that if the tax on dividends has been levied in excess of the amount due in accordance with a convention for the avoidance of double taxation, the recipient is entitled to a refund of the sums overpaid.
12 Paragraphs 3 and 4 of Chapter 6 of the inkomstskattelagen (1999:1229) (Law (1999:1229) on income tax) provide that Swedish legal persons are, as a general rule, subject to income tax on all their income in Sweden and abroad.
13 Paragraph 7 of Chapter 6 of that law provides that foreign legal persons are subject in part to income tax, that is to say, they are subject to limited tax liability only in respect of the income referred to in the first subparagraph of Paragraph 11 of that chapter, from which it follows that that liability in part covers, inter alia, income from a fixed establishment or immovable property situated in Sweden.
14 Under point 1 of the first subparagraph of Paragraph 2 of Chapter 7 of that law, the State is entirely exempt from a liability to tax. That derogation applies to the Swedish State as such, but not to public undertakings.
15 The first subparagraph of Paragraph 2 of Chapter 2 of Law (1999:1229) on income tax provides that the terms and expressions in that law also include equivalent foreign situations, unless it is indicated or is apparent from the context that only Swedish situations are covered. The second subparagraph of that Paragraph 2 specifies that the first subparagraph does not apply to provisions concerning the State.
16 The first subparagraph of Paragraph 9 of Chapter 6 of that law provides that foreign States and foreign authorities are to be treated as foreign companies.
The dispute in the main proceedings and the questions referred for a preliminary ruling
17 In Sweden, the pension funds governed by public law are part of the State and benefit from a tax exemption granted to the income of the State. The main task of those pension funds is to manage the capital which constitutes, in part, the income-based old-age pensions and forms part of the Swedish old-age pension. The general old-age pension scheme itself forms part of the public and compulsory social security system.
18 Keva is the pension fund which manages the pensions of local government employees in Finland. Its primary task is to manage the occupational pension insurance funds provided for by law. Keva collects pension contributions and pays pensions. It is a legal person governed by public law within the meaning of Finnish law and is exempt from tax in Finland.
19 The pension fund of the province of Åland is the pension fund responsible for managing the pensions of workers employed by the province of Åland. Its primary task is to manage the funds of the statutory occupational pension insurance scheme. However, it is the province of Åland which is responsible, inter alia, for the payment of employee pensions. The resources of the pension fund of the province of Åland are separate from the budget of the province of Åland. That fund does not have separate legal personality, but is part of the province of Åland. That fund is exempt in part from tax in Finland and does not pay tax on dividends received from public limited companies.
20 The Central Church Fund was the Finnish fund for employees of the Evangelical Lutheran Church of Finland until 1 January 2016. It managed the funds paid out under the statutory occupational pension insurance scheme. The payment of retirement pensions on its behalf was managed by Keva. The Central Church Fund does not have separate legal personality, but is part of the Evangelical Lutheran Church of Finland. The Central Church Fund is, in practice, exempt from income tax in Finland.
21 During the period from 2003 to 2016, the applicants in the main proceedings received dividends from Swedish companies which were subject to tax on dividends in Sweden. Since those dividends were not taxed in Finland, the tax on the dividends to which they were subject in Sweden could not be deducted as provided for in the Nordic Tax Convention.
22 Consequently, the applicants in the main proceedings applied to the Swedish tax agency for a refund of the tax on dividends to which they had been subject in Sweden. In support of their applications, they claimed that levying a tax on dividends was contrary to the free movement of capital, within the meaning of Article 63 TFEU, since those dividends were comparable to pension funds governed by Swedish public law, which are exempt from tax liability in Sweden.
23 The tax agency rejected those applications on the ground that the situation of the applicants in the main proceedings was not objectively comparable to that of pension funds governed by Swedish public law.
24 The applicants in the main proceedings brought an action before the Förvaltningsrätten i Falun (Administrative Court, Falun, Sweden) against the decisions of the tax agency, which were dismissed on the ground that the Finnish pension funds and pension funds governed by Swedish public law differ in certain respects as regards their tasks and organisation. Furthermore, the tax exemption of pension funds governed by Swedish public law is justified by the fact that they form part of the Swedish State. Given that it is a question of an exemption which is justified for reasons other than purely tax reasons, the levying of the tax on dividends cannot be regarded as discriminatory under Article 63 TFEU.
25 The applicants in the main proceedings brought an appeal against those judgments before the Kammarrätten i Sundsvall (Administrative Court of Appeal, Sundsvall, Sweden). Those actions were dismissed on the ground that EU law does not require Sweden to treat another Member State or a non-resident public body for tax purposes in the same way as the Swedish State. Furthermore, the tax exemption enjoyed by the Swedish State merely avoids the circular flow of funds within the public sector. Pension funds governed by Finnish public law and pension funds governed by Swedish public law are therefore not in objectively comparable situations.
26 The applicants in the main proceedings brought an appeal on a point of law against those judgments before the Högsta förvaltningsdomstolen (Supreme Administrative Court, Sweden), which is the referring court. That court granted the applicants leave to appeal regarding the compatibility of the tax on dividends paid by resident companies to non-resident pension funds governed by public law with the free movement of capital, within the meaning of Article 63 TFEU.
27 In the first place, the referring court asks whether the treatment of non-resident pension institutions governed by public law receiving dividends from resident companies is less favourable than that accorded to resident pension funds governed by public law.
28 First, pension funds governed by Swedish public law form part of the State, as a legal entity, and the assets they hold constitute State resources. The exemption from tax of dividends from resident companies received by those funds makes it possible to avoid the circular flow of those resources without a real economic advantage for the State. Thus, the fact that the Swedish State exercises its right to tax non-resident pension institutions governed by public law without itself being subject to tax cannot therefore be regarded as deterring other Member States from investing in Sweden through their pension institutions governed by public law.
29 Secondly, a different approach would be to consider that, if only dividends received by resident pension institutions governed by public law are exempt from tax, whereas dividends paid to similar but non-resident institutions are taxed, the latter would be placed at a disadvantage, which could constitute an obstacle to the free movement of capital, within the meaning of Article 63 TFEU.
30 In the second place, the referring court has doubts as to whether, in the present case, resident and non-resident pension funds governed by public law are in objectively comparable situations.
31 First, under the Swedish social security system, resident pension funds governed by public law serve as stabilisation funds for the State as regards income-based old-age pensions. Thus, there is no situation in which a non-resident pension institution governed by public law could de facto be entrusted with the same task as resident pension funds governed by public law. Consequently, a non-resident pension institution governed by public law could never be in a situation objectively comparable to that of the Swedish State and its pension funds governed by public law.
32 Secondly, it might be considered that, if the stated objective of the tax exemption enjoyed by the Swedish State and its pension funds governed by public law were an administrative simplification, the objective would also be to reduce the need to allocate to the public authorities the amounts corresponding to the taxes that they would be required to pay if they were not exempt from tax in order to perform their tasks in the public interest. As regards that objective, institutions which are regulated in the same way and which have the same task in other Member States are in an objectively comparable situation.
33 Furthermore, the referring court asks whether the comparison must be made with the Swedish State as such or only with the pension funds governed by public law themselves. The applicants in the main proceedings carry out certain tasks which are different to those carried out by pension funds governed by Swedish public law. More specifically, the latter are not responsible for either receiving pension contributions or paying pensions, but have the sole task of managing the income-based old-age pension insurance funds. However, those other tasks are carried out by other bodies, within the Swedish State, which also benefit from the tax exemption.
34 In the third and last place, the referring court has doubts as to whether a possible restriction may be justified by an overriding reason in the public interest.
35 In that regard, there appear to be two approaches. First, the difference in treatment at issue could be justified by the need to safeguard the objective pursued by Swedish social policy and its financing. The taxation of resident pension funds governed by public law means that the Swedish State should allocate the corresponding tax revenue to those funds in order that they avoid using their own funds. Secondly, loss of income or administrative difficulties do not constitute valid reasons capable of justifying a restriction on the free movement of capital within the meaning of Article 63 TFEU.
36 In that context, the Högsta förvaltningsdomstolen (Supreme Administrative Court) decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:
(1) Does the fact that dividends paid by domestic companies to foreign public pension institutions are subject to withholding tax, whereas the corresponding dividends are not taxed if they accrue to the own State through its general pension funds, constitute such negative differential treatment that it entails a restriction of the free movement of capital prohibited, in principle, by Article 63 TFEU?
(2) If Question 1 is answered in the affirmative, what are the criteria that should be taken into account when assessing whether a foreign public pension institution is in a situation which is objectively comparable to that of the own State and its general pension funds?
(3) Can a possible restriction be regarded as being justified by overriding reasons of public interest?’
Consideration of the questions referred
37 By its three questions, which it is appropriate to examine together, the referring court asks, in essence, whether Article 63 TFEU must be interpreted as precluding legislation of a Member State under which dividends distributed by resident companies to non-resident pension institutions governed by public law are subject to a withholding tax, whereas dividends distributed to resident pension funds governed by public law are exempt from such a withholding tax.
38 According to the Court’s case-law, the Member States must exercise their competence in the field of direct taxation in compliance with EU law and, in particular, with the fundamental freedoms guaranteed by the TFEU (judgments of 27 April 2023, L Fund, C‑537/20, EU:C:2023:339, paragraph 41 and the case-law cited, and of 7 September 2023, Cartrans Preda, C‑461/21, EU:C:2023:632, paragraph 61).
39 As regards the free movement of capital, the Court has already held that the provisions of the Treaty relating to that fundamental freedom do not draw a distinction between private undertakings and public undertakings (see, to that effect, judgment of 2 June 2005, Commission v Italy, C‑174/04, EU:C:2005:350, paragraph 32). Those provisions therefore do not exclude the public sector from their scope.
40 Article 63(1) TFEU generally prohibits restrictions on movements of capital between Member States. The measures prohibited by that provision as restrictions on the movement of capital include those which are liable to dissuade non-residents from making investments in a Member State or to dissuade residents of that Member State from making investments in other States (judgments of 27 April 2023, L Fund, C‑537/20, EU:C:2023:339, paragraph 42 and the case-law cited, and of 18 January 2024, JD (Residence requirement), C‑562/22, EU:C:2024:55, paragraph 34 and the case-law cited).
41 That being said, by virtue of Article 65(1)(a) TFEU, Article 63 TFEU is without prejudice to the right of Member States ‘to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested’.
42 That provision, in so far as it constitutes a derogation from the fundamental principle of the free movement of capital, must be interpreted strictly. Accordingly, it cannot be interpreted as meaning that all tax legislation which draws a distinction between taxpayers on the basis of their place of residence or the State in which they invest their capital is automatically compatible with the TFEU. The derogation provided for in Article 65(1)(a) TFEU is itself limited by Article 65(3) TFEU, which provides that the national provisions referred to in paragraph 1 of that article ‘shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63 [TFEU]’ (judgments of 27 April 2023, L Fund, C‑537/20, EU:C:2023:339, paragraph 44 and the case-law cited, and of 12 October 2023, BA (Inheritance – Public housing policy in the European Union), C‑670/21, EU:C:2023:763, paragraph 54).
43 The Court has also held that a distinction must therefore be drawn between differences in treatment permitted under Article 65(1)(a) TFEU and discrimination prohibited by Article 65(3) TFEU. For national tax legislation to be considered compatible with the provisions of the FEU Treaty relating to the free movement of capital, the resulting difference in treatment must relate to situations which are not objectively comparable or be justified by an overriding reason relating to the public interest (judgments of 27 April 2023, L Fund, C‑537/20, EU:C:2023:339, paragraph 45 and the case-law cited, and of 12 October 2023, BA (Inheritance – Public housing policy in the European Union), C‑670/21, EU:C:2023:763, paragraph 55).
44 It is therefore necessary to examine, first of all, the possible existence of a difference in treatment, next, the possible comparability of the situations at issue in the main proceedings, and finally, if necessary, the possibility of justifying the differential treatment.
Whether there is a restriction on the free movement of capital
45 In the present case, it is apparent from the order for reference that, as regards the tax treatment of dividends distributed by companies resident in Sweden, provided for in the first subparagraph of Paragraph 2 of Chapter 7 of Law (1999:1229) on income tax, resident pension funds governed by public law are exempt from the withholding tax provided for on dividends of that type, whereas non-resident pension institutions governed by public law do not benefit from such an exemption.
46 Such a difference in tax treatment leads to a disadvantageous treatment of dividends paid to non-resident pension institutions governed by public law, liable to deter those institutions from investing in companies established in Sweden (see, by analogy, judgment of 17 March 2022, AllianzGI-Fonds AEVN, C‑545/19, EU:C:2022:193, paragraph 39).
47 That conclusion cannot be called into question by the Swedish Government’s argument that the principle of non-discrimination, within the meaning of Article 24 of the OECD Model Tax Convention, does not mean that a State granting special tax advantages to its own public bodies is required to grant the same advantages to public bodies of another State, as is apparent from paragraphs 10 and 12 of the Commentary on Article 24.
48 In that regard, it is sufficient to note that that government cannot rely on those paragraphs in the Commentary on Article 24 of the OECD Model Tax Convention for the purpose of avoiding its obligations under the Treaty (see, by analogy, judgment of 16 July 2009, Damseaux, C‑128/08, EU:C:2009:471, paragraph 34).
49 As regards the Swedish Government’s argument that, in the absence of harmonisation of EU law in the field, that law does not impose any obligation common to the Member States to contribute to the financing of the social security systems of other Member States, it must be recalled that, although it is common ground that EU law respects the power of the Member States to organise their social security systems, the fact remains that, when exercising that power, the Member States must comply with EU law and, in particular, with the provisions of the TFEU relating to the fundamental freedoms (see, to that effect, judgments of 28 April 2022, Gerencia Regional de Salud de Castilla y León, C‑86/21, EU:C:2022:310, paragraph 18, and of 30 June 2022, INSS (Combination of total occupational invalidity pensions), C‑625/20, EU:C:2022:508, paragraph 30 and the case-law cited).
50 In those circumstances, it must be held that national legislation such as that at issue in the main proceedings constitutes a restriction on the free movement of capital, prohibited, in principle, by Article 63 TFEU.
Whether the situations are comparable
51 It follows from the Court’s case-law, first, that the comparability or otherwise of a cross-border situation with a domestic situation must be examined having regard to the objective pursued by the national provisions at issue and to the purpose and content of those provisions, and, secondly, that only the relevant distinguishing criteria established by the legislation at issue must be taken into account for the purpose of assessing whether the difference in treatment resulting from such legislation reflects a difference in objective situation (judgments of 27 April 2023, L Fund, C‑537/20, EU:C:2023:339, paragraph 54 and the case-law cited, and of 12 October 2023, BA (Inheritance – Public housing policy in the European Union), C‑670/21, EU:C:2023:763, paragraph 59).
52 As regards, in the first place, the objectives and purpose of the Swedish scheme on the taxation of dividends, it is apparent, in essence, from the order for reference that the tax exemption of company dividends received by resident pension funds governed by public law is intended to avoid a circular flow of public resources of the Swedish State.
53 In that regard, the Swedish Government confirms that the exemption provided for in the first subparagraph of Paragraph 2 of Chapter 7 of Law (1999:1229) on income tax is intended to avoid a circular flow of public resources of the Swedish State and adds that that exemption is intended to promote the stability and viability of the Swedish pension scheme.
54 On the other hand, the European Commission submits, in its written observations, that the purpose of that exemption is not to contribute to the financing of the Swedish social security system, but that it is indeed intended to avoid the taxation of dividends paid by companies and received by resident pension funds governed by public law which would result in a circular flow of public resources. The European Commission considers that the implicit objective of that exemption is to avoid having to grant public bodies, such as Swedish pension funds governed by public law, resources drawn from the State budget to offset the tax which they would otherwise have to pay.
55 In that context, in so far as the Swedish system for the exemption of dividends received by pension funds governed by public law is intended to avoid a circular flow of the Swedish State’s public resources, which it is for the referring court to ascertain, it must be held that the fact that such a pension fund is part of the Swedish State does not necessarily place it in a different situation from that of a non-resident pension institution governed by public law.
56 That objective could also be achieved if non-resident pension institutions governed by public law were to benefit in Sweden from an exemption from withholding tax on dividends paid by resident companies in the same way as resident pension funds governed by public law.
57 As regards the argument of the Swedish Government and the tax agency alleging that, in essence, from the point of view of the objective of promoting the stability and viability of the Swedish pension scheme, non-resident pension institutions governed by public law are not intended to promote the financial stability and viability of the Swedish social security system, unlike resident pension funds governed by public law, it suffices to note, as the Advocate General stated, in essence, in point 30 of his Opinion, that, although, by definition, the objective of each fund is to protect the stability and viability of a separate national pension system, that cannot render impossible the cross-border comparison of pension funds.
58 Furthermore, the objective of promoting the stability and viability of the Swedish pension scheme is defined in such a way that resident pension funds governed by public law meet that objective, whereas all non-resident pension institutions governed by public law are automatically excluded from the exemption provided for in the first subparagraph of Paragraph 2 of Chapter 7 of Law (1999:1229) on income tax (see, by analogy, judgment of 16 June 2011, Commission v Austria, C‑10/10, EU:C:2011:399, paragraph 34).
59 As regards, in the second place, the relevant distinguishing criteria established by the national legislation at issue, the Swedish tax agency and the Swedish and Spanish Governments submitted that the only distinguishing criterion laid down by that legislation is not based on the place of residence but on the fact that resident pension funds governed by public law share the legal personality of the Swedish State.
60 In that regard, it is apparent from the order for reference that the Swedish and Finnish general old-age pension schemes have the same social objective, the same task and the same type of legal organisation. Their method of financing is identical and they have a similar mode of operation. Nevertheless, Finnish pension institutions governed by public law have certain characteristics which differ from those of Swedish pension funds governed by public law in that those institutions have varying legal forms. Furthermore, Swedish pension funds governed by public law are not responsible for collecting pension contributions and paying pensions, although that task is nevertheless carried out by the Swedish public authorities.
61 As the Commission submitted, in essence, at the hearing, it is sufficient to note, in that regard, that, subject to the verifications which it is for the referring court to carry out, the collection of pension contributions, the payment of pensions and the legal form of the fund concerned do not appear to have a direct link with the tax treatment of the dividends received from Swedish companies.
62 Therefore, it must be held that, since only resident pension funds governed by public law benefit from the exemption provided for in the first subparagraph of Paragraph 2 of Chapter 7 of Law (1999:1229) on income tax, non-resident pension institutions governed by public law being excluded from the benefit of that exemption, the only criterion capable of distinguishing between pension funds governed by Swedish public law and non-resident pension institutions governed by public law is in actual fact the place of residence of the funds.
63 In the light of all the foregoing, it must be held that, in the present case, the difference in treatment between non-resident pension institutions governed by public law and resident pension funds governed by public law, as established in paragraph 46 above, concerns situations that are objectively comparable.
Whether there is an overriding reason in the public interest
64 It should be noted that, according to settled case-law, a restriction on the free movement of capital may be permitted if it is justified by overriding reasons relating to the public interest, is suitable for securing the attainment of the objective which it pursues and does not go beyond what is necessary in order to attain that objective (judgments of 27 April 2023, L Fund, C‑537/20, EU:C:2023:339, paragraph 66 and the case-law cited, and of 16 November 2023, Autoridade Tributária e Aduaneira (Capital gains on share transfers), C‑472/22, EU:C:2023:880, paragraph 35 and the case-law cited).
65 In the present case, the Swedish Government submits, in its written observations, that, even if the national legislation at issue in the main proceedings constitutes a restriction on the free movement of capital, the restriction of the exemption provided for in the first subparagraph of Paragraph 2 of Chapter 7 of Law (1999:1229) on income tax to resident pension funds governed by public law is justified in the light of two overriding reasons in the public interest, namely: (i) the need to safeguard the objective pursued by Swedish social policy and its financing and (ii) the principle of territoriality combined with the need to preserve a balanced allocation of the powers between the Member States as regards the general income-based old-age pension scheme.
66 As regards, in the first place, the need to safeguard the objective pursued by Swedish social policy, the Swedish Government submits that, first, the taxation of resident pension funds governed by public law means that it would be necessary to allocate the corresponding tax revenue to those funds in the annual budget proposal in order for those funds not to use their own funds to finance that tax. In such a scenario, other areas of expenditure could be favoured to the detriment of the general income-based old-age pension scheme, which would reduce the ability of those funds to carry out their task.
67 Secondly, the Swedish government states that the tax exemption enjoyed by resident pension funds governed by public law makes it possible to guarantee, inter alia, the autonomous status of the general Swedish scheme for old-age pensions based on income and relies in that regard on the judgment of 22 October 2013, Essent and Others (C‑105/12 to C‑107/12, EU:C:2013:677), in which the Court held that national legislation could constitute a justified restriction on a fundamental freedom when it is dictated by reasons of an economic nature in the pursuit of an objective in the public interest. In addition, that exemption makes it possible to avoid an unnecessarily costly circular flow of public resources.
68 In that regard, it should be noted that administrative disadvantages are not alone sufficient to justify a barrier to the free movement of capital (judgment of 7 April 2022, Veronsaajien oikeudenvalvontayksikkö (Exemption of contractual investment funds), C‑342/20, EU:C:2022:276, paragraph 90 and the case-law cited).
69 In addition, it should be noted that, unlike the case which gave rise to the judgment of 22 October 2013, Essent and Others (C‑105/12 to C‑107/12, EU:C:2013:677), which related to a prohibition of privatisation, in the present case, the restriction on the free movement of capital does not affect the rules relating to ownership of non-resident pension institutions governed by public law.
70 In the second place, as regards the principle of territoriality combined with the need to preserve a balanced allocation of the powers between the Member States as regards the general income-based old-age pension scheme, the Swedish Government submits that a Member State, in accordance with that principle, has the right to tax income generated in its own territory. Furthermore, EU law does not require a Member State to contribute to the financing of general national old-age pension schemes of other Member States.
71 In so doing, the Swedish Government submits that, in reality, the restriction on the free movement of capital at issue is justified by the need to preserve a balanced allocation of the power of taxation between the Member States.
72 In that regard, in accordance with the settled case-law of the Court, the justification based on the preservation of the balanced allocation of the power to tax between the Member States may be accepted where the scheme at issue is intended to prevent conduct likely to jeopardise the right of a Member State to exercise its taxing powers in relation to activities carried out within its territory (judgment of 27 April 2023, L Fund, C‑537/20, EU:C:2023:339, paragraph 76 and the case-law cited).
73 However, where a Member State has chosen, as in the situation at issue in the main proceedings, not to tax resident funds on their domestic income, it cannot rely on the need to ensure a balanced allocation of the power of taxation between Member States in order to justify the taxation of non-resident funds which receive such income (judgment of 27 April 2023, L Fund, C‑537/20, EU:C:2023:339, paragraph 77 and the case-law cited).
74 It follows that the justification based on the preservation of a balanced allocation of the power to impose taxes between the Member States cannot be accepted either.
75 Accordingly, the national legislation at issue in the main proceedings cannot be regarded as compatible with the provisions of the TFEU on the free movement of capital on the ground that it is justified by an overriding reason in the public interest.
76 In the light of all of the foregoing, the answer to the questions referred is that Article 63 TFEU must be interpreted as precluding legislation of a Member State under which dividends distributed by resident companies to non-resident pension institutions governed by public law are subject to a withholding tax, whereas dividends distributed to resident pension funds governed by public law are exempt from such a withholding tax.
Costs
77 Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the referring court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.
On those grounds, the Court (First Chamber) hereby rules:
Article 63 TFEU must be interpreted as precluding legislation of a Member State under which dividends distributed by resident companies to non-resident pension institutions governed by public law are subject to a withholding tax, whereas dividends distributed to resident pension funds governed by public law are exempt from such a withholding tax.
[Signatures]