Swedish gaming company to challenge additional tax from Maltese restructuring

Net Entertainment NE AB said that it will lodge an appeal with Stockholm's Administrative Law Court

challenging the Swedish Tax Agency's position that the company's decision to switch many of its operations to Malta had no commercial justification.

Analysts suggest that the impending court ruling on the legality of the Swedish agency's stance could set a wider precedent.

The case concerns the motivation for a Jan. 1, 2007, group restructuring that entailed moving many of the company's sales, marketing, customer support, and product development operations from Sweden to Malta.

The parent company and most of the management functions remained in the Sweden. As part of the restructuring, the parent company was deemed a service provider that sold its services to the Maltese arm.

An audit by the Swedish Tax Agency (Skatteverket) for the fiscal years 2007-10 concluded that the Maltese operation did not possess the necessary competence needed to carry out many of the

tasks that it had been assigned. Since no genuine business motivation for the reorganisation existed, the agency concluded, the company remained liable for tax in Sweden during the relevant period, and additional tax and penalties totaling US$14 million was payable.

Expert Advice

On Jan. 3, 2013 the company released a statement pointing out that the agency's interpretation of Swedish tax law was at odds with expert advice it had received from accounting firm PricewaterhouseCoopers and the Swedish law firm Lindahl.

 "Net Entertainment insists that it has followed applicable laws for taxation of its operations, which is also supported by the experts that the company has consulted on the subject," the statement said. "Net Entertainment pays taxes according to the applicable laws and based on the operations that are conducted in each country respectively."

A company spokeswoman, Maria Hedengren, said that it would appeal. "Our view, supported by legal and tax experts, is that the Swedish Tax Agency's decision is unfounded," she said.

"Together with our legal and tax experts, we believe the correct portion of the group profits were taxed in Sweden."

Hedengren said the operation in Malta "is the heart of our business," adding, "We have a license to operate there and this is where we host most of our customers today. Our sales, marketing and product strategic functions as well as customer support are located here and the majority of our hosting is run out of Malta. We maintain that Net Entertainment pays taxes according to the applicable laws and based on the operations that are conducted in each country respectively."

The administrative law court is the first instance of appeal in the case, she said, adding that further appeals cannot be ruled out should the court side with the Tax Agency. "We cannot speculate at this time how far this can go or how long it can take" she said.

Meanwhile, the result of the appeal could form a precedent in Swedish law and also could be seen as important at an international level.