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ECJ strikes down Sweden’s CGT deferral on home sales

The European Court of Justice held, 18 January 2007, that Sweden's capital gains tax deferral on proceeds from the sale of a principal residence, which is conditional on the purchase of a new home in Sweden, violates fundamental freedoms in the EC Treaty and the European Economic Area Agreement.

The Swedish government recognised that Chapter 47 of the law on income tax (inkomstskattelagen (1999:1229)), which makes entitlement to deferral of taxation on capital gains arising from the sale of a private residential property or of a right to reside in a private cooperative property conditional on the newly-acquired residence also being on Swedish territory, represents an obstacle to the free movement of persons and capital. But it considered that these provisions were justified by overriding requirements in the general interest and, more particularly, the need to maintain the coherence of the national tax system.

The Commission disagreed and issued a reasoned opinion on 5 July 2005 in which, firstly, it reiterated its complaint that the disputed provisions of Chapter 47 undermine the free movement of both persons and capital and, secondly, it called upon the Kingdom of Sweden to adopt the measures necessary to comply with that opinion within a period of two months from its notification.

In its reply, the Swedish government maintained its position that the provisions were justified by the need to maintain the coherence of the national tax system, the Commission decided to bring the present action.

In case C-104/06, the Court declared that, by adopting and maintaining in force tax provisions, such as those in Chapter 47, which make entitlement to deferral of taxation on capital gains arising from the sale of a private residential property or of a right to reside in a private cooperative property conditional on the newly-acquired residence also being on Swedish territory, the Kingdom of Sweden has failed to fulfill its obligations under Articles 18 EC, 39 EC and 43 EC and under Articles 28 and 31 of the EEA Agreement.

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