Sweden’s Supreme Administrative Court has ruled in favour of Kubikenborg Aluminium AB, overturning a transfer pricing-based adjustment by Skatteverket over the deductibility of SEK 211 million in damages linked to the early termination of a long-term electricity contract, finding that the correction rule requirements were not met under the arm’s length principle.
Sweden’s Supreme Administrative Court has ruled in favour of Kubikenborg Aluminium AB (Kubal), overturning a transfer pricing-based adjustment made by the Swedish Tax Agency in a dispute concerning the deductibility of damages arising from an early termination of an electricity contract.
The case, Kubikenborg Aluminium AB (Kubal) v. Skatteverket, decided on 19 May 2026, concerned the application of the “correction rule” under transfer pricing law and the deductibility of damages paid by the company following termination of a long-term electricity agreement with Vattenfall.
Kubal is part of an international group with United Company Rusal Plc as its parent, and it operates an aluminium refinery receiving raw materials from group company RTI Limited (Jersey) under a “conversion agreement”. Under that arrangement, Kubal refines materials for RTI and is compensated for costs plus a six per cent markup.
A key input in production was electricity, supplied under a fixed-price contract with Vattenfall covering 2008–2016, supported by a parent company guarantee from Rusal. When market prices fell, making the contract disadvantageous, Kubal terminated the agreement early in 2016. The termination led to a legal dispute and Kubal paying approximately SEK 211 million in damages to Vattenfall. The company deducted this amount in its tax return and subsequently received an unconditional shareholder contribution of 204 million Swedish krona from Rusal.
Skatteverket disallowed the deduction by applying the correction rule, arguing that the terms of the arrangement deviated from what independent parties would have agreed under the arm’s length principle. The authority contended that Kubal had no independent incentive to terminate the Vattenfall contract because RTI already covered all electricity costs under the conversion agreement. It argued that an independent company would not have assumed the risk of significant damages without compensation affecting its profit, and that the structure shifted costs to Sweden while Rusal benefited from group-wide electricity savings.
Kubal argued that consultation with its parent company did not constitute a transaction under the correction rule and that it had been compensated through the shareholder contribution.
The Supreme Administrative Court held that an informal agreement to terminate a contract and pay damages can be treated as a transaction for transfer pricing purposes, even in the absence of a formal written agreement. However, it ruled that the correction rule requires a proper assessment of risk allocation within the group’s broader business model.
The court found that although Rusal provided a parent company guarantee, the economic exposure to electricity costs primarily rested with RTI under the conversion agreement, with Rusal only bearing a secondary role. On this basis, the court concluded that the risk associated with the electricity contract was not borne by Kubal in a manner that would justify applying the correction rule.
The court also stated that even if the group as a whole benefited from reduced electricity costs, this did not establish that income had been transferred from Kubal to the parent company in breach of the arm’s length principle.
Accordingly, the Supreme Administrative Court annulled the Swedish Tax Agency’s adjustment, ruled in favour of Kubal, and granted compensation for legal costs.
