Continued right to deduction of exchange rate losses on intra-group receivables

The Supreme Administrative Court determined, in a decision announced in February 2016, that exchange rate losses on intra-group receivables are to be included in the capital gains calculation on the receivables, implying that exchange rate losses cannot be deducted. However, in the case in question, deduction was granted based on EU law. The Tax Agency is of the opinion that this decision does not affect the Agency’s previous position in this matter, that is, that deduction is to be granted for exchange rate losses on intra-group receivables.

In a position statement from December 2007, the Tax Agency concluded that a change in exchange rates on receivables was to be taxed according to the general rules for taxation applying to business operations and not according to the special rules applying to capital gains and capital losses. This was to apply in spite of the fact that capital losses on intra-group receivables are not deductible. The Tax Agency’s position applies regardless of whether the receivable remains as a receivable at the end of the financial year or is disposed of during that year. The cost of a capital asset is to be adjusted to reflect any change in the exchange rate. This also applies to exchange rate changes on receivables arising between two companies belonging to a community of interests, and where the receivables are disposed of during the year.

The Supreme Administrative Court’s decision in February concerned receivables in Euro owned by a Swedish company having Euro as its reporting currency. The Court concluded the following:

• The receivables are capital assets.
• The value changes arising due to changes in exchange rates between the Euro and krona are to be included in the capital gains calculation on receivables.
• The prohibition of deduction of capital losses on receivables in companies in a community of interests also includes capital losses arising due to changed exchange rates between the Euro and krona.
• The prohibition on deduction comprises a restriction to the free movement of capital between EU member states that cannot be legally justified.

The Supreme Administrative Court accordingly determined that exchange rate losses should be included in the capitals gains calculation on the intra-group receivables but that deduction of the exchange rate losses in the case in question should be granted with the support of EU law.

The Tax Agency’s assessment as presented in legal case commentary is that the outcome of the case depended on the special premises in question, that is, that the receivables in Euro were not in a foreign currency as the company had Euro as its reporting currency, at the same time as taxation took place in Swedish krona. The Tax Agency is of the opinion that the Supreme Administrative Court’s decision does not affect their position in this matter as stated in 2007.

Comments

It can be noted that the Supreme Administrative Court is of the opinion that the prohibition on deduction of capital losses on intra-group receivables is applicable, as a starting point, to exchange rate changes on receivables in Euro in a company with Euro as its reporting currency. However, the Tax Agency believes, with reference to that which is considered to comprise special premises in the case in question, that the decision does not affect its previous position, that is, that deduction should be granted for exchange rate losses on intra-group receivables which are capital assets. With the position statement as the starting point, exchange rate losses on intra-group receivables in a currency other than the company’s reporting currency should be deductible.