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Sweden Slammed Over CGT, Income Tax

by Ulrika Lomas, for, Brussels

26 July 2007

It emerged on Tuesday that the Swedish government is facing EC scrutiny over two aspects of its tax regime.

The Swedish authorities are firstly facing legal action for failing to fully comply with a Court judgement regarding the rules on capital gains tax relief on dwelling sales (or Bostadsrätt).

Under Swedish law, a deferral of tax is not allowed on capital gains made by a person on the sale of his private dwelling, if the dwelling which is bought or sold is situated abroad and is not owned through a similar legal form as "privatbostadsföretag". The overwhelming majority of Swedish apartments are owned via that legal form, and there are few legal forms of ownership which are similar to the Swedish form "privatbostadsföretag" in other Member States.

This means that, in practice, it appears very difficult to satisfy the criteria of the Swedish law when buying or selling an apartment in another Member State, and thus to benefit from the same treatment as in a purely internal situation.

Persons wishing to make use of their right to free movement, selling their apartment abroad and buying a house or an apartment in Sweden, or selling their house or apartment in Sweden and buying an apartment abroad, will therefore risk being dissuaded from this course of action, due to the significant increase in tax burden that would occur for them in relation to a purely internal situation.

Sending a letter of formal notice under Article 228 of the EC Treaty, the European Commission announced that it had decided to open a new infringement procedure against Sweden regarding this matter.

The EC explained that:

"Despite some modifications in the law and the recent European Court of Justice judgement, the Swedish capital gain tax legislation still continue to favour in practice the acquisition/sale of apartments located in Sweden, therefore discriminating persons wishing to buy/sell an apartment elsewhere in Europe. If Sweden fails to comply with the letter of formal notice, the Commission may address further a reasoned opinion to Sweden before bringing the matter to the Court of Justice a second time, seeking the imposition of a penalty payment."

"The rules of the Internal Market forbid any restriction of the free movement of persons between Member States" added EU Taxation and Customs Commissioner, László Kovács. "A person who sells his house or apartment in any Member State should not be discriminated because he has made use of his right to free movement and bought an apartment in a State other than Sweden".

The Commission also revealed on Tuesday that it has launched infringement proceedings against Sweden for its restrictive rules on income tax applied to non-resident tax payers

The Swedish law on taxation of income of non residents (SINK) does not allow a person who is not a Swedish resident, but who earns all or almost all of his income in Sweden, to make the same deductions as a Swedish resident.

Non residents that are in this situation are thus disadvantaged if they take up residence in another Member State.

The EC revealed that:

"The European Commission has formally requested Sweden to end discriminatory rules on income tax applied to non-resident tax payers. It considers that the Swedish provision on taxation of non-residents does not respect the free movement of persons, since it does not allow a non-resident having all or almost all his income from Sweden to deduct mortgage interests to the same extent as a resident."

"Therefore, the Commission requests Sweden to grant the same rights to deductions reserved to residents to non-residents earning all or almost all their income in Sweden. The request takes the form of a reasoned opinion (second step of the infringement procedure provided for in article 226 of the EC Treaty). If the relevant national legislation is not amended within two months to comply with the reasoned opinion, the Commission may refer the matter to the European Court of Justice."

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