Extending Dividend Tax Exemptions to Foreign Public Pension Funds: The CJEU’s Ruling in Case C-39/23

Introduction

The judgment of the Court of Justice of the European Union in Case C-39/23, concerning the compatibility with Article 63 TFEU of national tax rules that subject dividends paid to foreign public pension institutions to withholding tax while exempting dividends received by domestic public pension funds. The analysis focuses on three interrelated legal questions: whether such differential treatment constitutes a restriction on the free movement of capital, how the objective comparability between resident and non-resident public pension institutions must be assessed, and whether any resulting restriction may be justified by overriding reasons of public interest. The Court’s reasoning and highlights the broader tax implications of the ruling for Member States that maintain preferential dividend tax regimes for domestic public bodies, particularly in the context of cross-border investment by public pension funds within the European Union.

Background

The case concerns the compatibility with Article 63 TFEU of Swedish tax legislation under which dividends distributed by Swedish resident companies to non-resident public pension institutions are subject to withholding tax, while dividends distributed to Swedish public pension funds are exempt. The applicants, public pension institutions governed by Finnish public law, received dividends from Swedish companies and were unable to offset the Swedish withholding tax in Finland due to their domestic tax-exempt status. They argued that this differential treatment constituted a restriction on the free movement of capital. The Swedish authorities rejected their claims, asserting that resident and non-resident public pension funds were not in objectively comparable situations and that any difference in treatment was justified by public interest considerations. These issues led the Swedish Supreme Administrative Court to refer three questions to the Court of Justice of the European Union

Question (1): Existence of a Restriction on the Free Movement of Capital

The Court held that the imposition of withholding tax on dividends paid to non-resident public pension institutions, while exempting dividends paid to resident public pension funds, constitutes negative differential treatment. Such treatment places non-resident institutions at a disadvantage and is liable to deter them from investing in companies established in the source Member State. This deterrent effect is sufficient to qualify the measure as a restriction on the free movement of capital within the meaning of Article 63 TFEU. The Court emphasized that the free movement of capital applies equally to public and private investors and that Member States must exercise their taxing powers in compliance with EU fundamental freedoms. Consequently, the answer to the first question was clearly in the affirmative.

Question (2): Criteria for Assessing Objective Comparability

In assessing objective comparability, the Court reaffirmed that the analysis must focus on the objective and content of the national tax provisions at issue. The relevant comparison is not based on formal elements such as legal personality, internal administrative structure, or the specific mechanics of contribution collection and pension payments. Instead, it must consider whether the institutions are comparable in light of the purpose of the tax exemption. In this case, the exemption aimed to avoid a circular flow of public resources within the Swedish State. The Court found that this objective does not, in itself, justify excluding foreign public pension institutions, since extending the exemption to them would not undermine that aim. As the decisive distinguishing factor was effectively the place of residence, the Court concluded that resident and non-resident public pension institutions were in objectively comparable situations.

Question (3): Justification by Overriding Reasons of Public Interest

The Court then examined whether the restriction could be justified by overriding reasons of public interest, such as safeguarding the objectives of Swedish social policy or preserving a balanced allocation of taxing powers between Member States. It rejected both arguments. Administrative considerations and the avoidance of internal budgetary transfers were deemed insufficient to justify a restriction on a fundamental freedom. Likewise, the Court reiterated that a Member State which chooses not to tax domestic pension funds on domestic income cannot rely on the principle of fiscal territoriality or balanced allocation of taxing powers to justify taxing non-resident funds on the same income. As a result, no valid justification was accepted.

Tax Implications and Consequences of the Judgment

The judgment has significant tax implications for Member States that grant dividend tax exemptions exclusively to domestic public pension funds. Such regimes must be reviewed to ensure compliance with Article 63 TFEU. In practical terms, source states may be required either to extend dividend withholding tax exemptions to comparable non-resident public pension institutions or to redesign their systems in a manner that does not result in residence-based discrimination. In particular, this expanded scope may arguably include certain sovereign wealth funds (SWFs). These funds, while often operating through distinct legal entities and not necessarily investing explicitly in the name of the foreign state, are typically state-owned investment vehicles tasked with managing public capital as part of governmental functions, such as economic stabilisation or long-term fiscal planning. On this basis, the formal legal structure of the investment vehicle should not be determinative. What matters is whether the entity forms part of a foreign state and carries out asset management activities in the exercise of public functions, a criterion that many SWFs would generally satisfy.

The ruling also strengthens refund claims by foreign public pension funds that have suffered withholding tax under similar regimes in the past, subject to national procedural rules. SWF is objectively comparable to a Swedish tax-exempt entity and belongs to a foreign state within the EEA, or to a state that has concluded a tax treaty or special agreement with Sweden, it may be entitled to claim a refund of Swedish withholding tax on dividends received from Swedish companies. The comparability analysis remains central and must be assessed in light of the objectives of the Swedish exemption regime, as clarified by the Court.

Conclusion

The Court concluded that Article 63 TFEU precludes national legislation under which dividends paid to non-resident public pension institutions are taxed while equivalent dividends paid to resident public pension funds are exempt. The case reinforces a consistent line of jurisprudence requiring strict scrutiny of residence-based distinctions in dividend taxation and limits the scope for Member States to justify such distinctions by reference to internal public finance or social policy considerations.