June 2025 marked a potential shift in Sweden’s approach to taxing foreign state entities. The Swedish Ministry of Finance has published a legislative proposal to amend the country’s dividend withholding regime - specifically the Coupon Tax Law (Swe: Kupongskattelagen, 1970:624) - to bring it in line with recent Court of Justice of the European Union (CJEU) and Supreme Administrative Court (SAC) rulings.
The proposed changes follow the CJEU’s judgment in Keva v. Sweden (C-39/23) and Sweden’s own Supreme Administrative Court decisions issued on 19 December 2024 (HFD 2024 ref. 63, HFD 2024 not. 73, and HFD 2024 not. 74). These rulings found that the current regime violates the free movement of capital under EU law as enshrined in the Treaty on the Functioning of the European Union (TFEU) by taxing foreign public pension funds on Swedish dividends while exempting Swedish public pension funds from the same tax.
Background: The Current Withholding Tax Framework
The Proposal: Equal Treatment for Foreign Public Entities
Why This Matters: Toward EU-Aligned Tax Neutrality
Implications for Foreign State Entities including Public Pension Funds
Under existing Swedish rules, foreign states and entities equivalent to Swedish municipalities and regions are subject to a 30% withholding tax on dividends from Swedish companies and investment funds. However, this rate may be reduced under the provisions of an applicable tax treaty concluded with Sweden. By contrast, Sweden’s state, regions, municipalities, and local authorities are exempt from tax under Chapter 7, Section 2 of the Income Tax Act (1999:1229).
As noted in the proposal (“Ett undantag i kupongskattelagen för utländska stater”), Sweden’s public pension funds - the AP funds - are classified as State authorities.
The rationale for exempting Swedish public pension funds, according to the government, was to avoid circular tax flows. Moreover, Sweden noted that maintaining this exemption is essential to preserving the preferential treatment these funds receive with countries like the United States.
However, the CJEU held that this difference in treatment creates an obstacle to the free movement of capital, in violation of EU law. Sweden has therefore opted for the alternative of exempting foreign states and counterparts to Swedish municipalities, regions, and municipal associations from the coupon tax liability. This approach ensures compliance with EU law while maintaining the current regime for domestic public entities.
On 9 June 2025, Sweden’s Ministry of Finance published a proposal for reform. The exemption would apply to foreign states; entities equivalent to Swedish regions, municipalities, or municipal associations in respect of dividends received from Swedish companies, mutual funds, and special funds.
To qualify, the foreign state or entity must either be located within the European Economic Area (EEA), or have entered into an agreement with Sweden that allows for the exchange of tax information.
The proposal makes clear that public pension institutions governed by public law are within the scope of the exemption, while state-owned companies are not.
This distinction is important as it ensures that public pension institutions - those serving sovereign social security purposes - qualify, while excluding the commercial arms of the state from relief.
The proposal also provides interpretive guidance on how foreign equivalents can assess whether they qualify for the exemption. Rather than requiring an exact institutional match, a broader test of comparability applies:
“As for comparisons of foreign counterparts under the provisions of the Income Tax Act, the comparison should be made from both a Swedish and a foreign perspective. It cannot be required to be an absolute identity; it can be determined in individual cases whether the similarities are so great that the foreign phenomenon can be considered to correspond to the Swedish term (cf. prop. 1999/2000:1 Part 2, p. 21 f.).”
This provision allows eligible entities to demonstrate their comparability based on function and substance, not purely on legal form or terminology.
The new exemption is proposed to apply to dividends paid on or after 1 July 2026. For dividends already distributed, the provisions of the coupon tax law may still be applied in accordance with European law, including the recent CJEU and SAC decisions.
The statute of limitations generally requires that reclaims be filed by the end of the fifth calendar year following the year in which dividends were paid.
Given the case-by-case nature of determining eligibility under the proposed framework, appropriate documentation and legal support will be essential when filing such claims.
This proposal represents a broader recognition that domestic tax systems must adapt to EU law principles, particularly where domestic exemptions unfairly disadvantage comparable foreign entities.
The Keva ruling, together with Sweden’s proposed changes, underscores that rules targeting public entities—just like those affecting investment funds—must be designed to ensure tax neutrality and avoid unjustified restrictions on cross-border investment flows.
Foreign states, public pension funds, and similar state institutions should now assess their Swedish dividend positions to determine whether reclaims are available—either by qualifying for the proposed exemption from 1 July 2026 onward, or by relying on existing EU law and relevant CJEU rulings to support a reclaim.
The proposed changes are particularly significant for foreign state authorities and public pension institutions with holdings in Swedish equities. Under current law, these entities have often been subject to Sweden’s 30% withholding tax on dividends, even when performing functions and holding structures comparable to those of Swedish exempt entities.
The recent Keva ruling and Sweden’s legislative response clarify that the discriminatory treatment of foreign public bodies is no longer justifiable under EU law. Where foreign public entities can demonstrate that they are sufficiently comparable to Sweden’s State, or to Swedish regions, municipalities, municipal associations, or public pension funds, they should be eligible to benefit from the same tax exemptions.
This development not only creates new opportunities for forward-looking exemption once the law enters into force in July 2026, but also reinforces the right to reclaim historical withholding tax under EU law and Swedish case precedent, provided that claims are filed within the statute of limitations. Refund claims, filed on the basis of the free movement of capital, can now carry stronger legal footing and may avoid the prolonged litigation that has often been necessary in the past.
For detailed information on the impact of the recent proposal, we encourage you to promptly get in touch with WTax’s regional specialists.