New Swedish court decision – internal loans deductible in most situations

The right to deduct interest expenses on internal loans is, and has long been, the subject of both the legislature and the courts. The issue has given rise to extensive regulations and legal trials. The distinction between commercial reasons and arrangements that have been developed solely for the purpose of obtaining a tax advantage, so-called wholly artificial arrangements or unlawful abuse of procedure, has been central. On 8 May 2025, the Supreme Administrative Court (HFD) issued a judgment in case no. 6988-24, where the right to interest deduction under the exemption rule in Chapter 24. Section 18 of the Income Tax Act (IL) was examined in relation to an internal loan from an Irish group company.

Background of the case 

X AB, a wholly-owned subsidiary of Y AB, intends to raise a new loan from an Irish sister company. The loan will be used to finance an external acquisition of shares. The loan will run on market terms and the interest income will be taxed in Ireland at a rate of 12.5 percent corporation tax. X AB applied for an advance ruling to clarify whether the interest expenses on the new loan should be covered by the exemption rule in Chapter 24. Section 18 of the IL. This rule limits the right to deduct interest expenses on debts to associated companies if the debt relationship arose exclusively or almost exclusively in order for the group to receive a substantial tax advantage.   

Assessment of the Supreme Administrative Court 

In its judgment, the Supreme Administrative Court upheld the ruling of the Council for Advance Tax Rulings and concludes that the interest expenses are not covered by the exemption rule. The Court notes at the outset that, in view of the size of the loan and the difference in tax rates between Sweden and Ireland, the debt relationship constitutes a tax advantage. The Court then goes further and emphasizes that the exception rule is intended to apply to cases of pure abuse, where tax planning is the dominant or only purpose of the arrangement. In the case in question, the loan will be used for an external acquisition. The loan was therefore considered to meet a real financing need and thus be commercially justified. Therefore, the debt relationship could not be considered to have arisen exclusively or almost exclusively in order to obtain a substantial tax advantage.  

In its judgment, the Court refers to the preparatory work and previous case law, where it is clear that a very high degree of tax planning is required for the exemption rule to be applicable – a small amount of commercial reasons is sufficient for the arrangement not to be considered a pure case of abuse.  

Our comment 

The judgment is clearly written and confirms the restrictive application of the exemption rule in Chapter 24, Section 18 of the IL. In order for the exemption rule to be applicable, tax planning must be the dominant or sole purpose of the debt relationship.  

It is also welcome to have additional case law that clarifies the scope of the rule. The Court is very clear - in highlighting that the new version of the exemption introduced in 2019 has a more limited scope of application than the rules that applied previously.  

A clarification of the limited scope of the exemption rule is also important in light of the European Court of Justice's judgment in the X BV case in the autumn of 2024 (C-585/22). The outcome of this judgment meant that intra-group loans without valid commercial motives, solely for the purpose of shifting taxable earnings, were considered to be "purely artificial arrangements". This even though the loans had market terms. After X BV, we have therefore seen that the Tax Agency to a greater extent has begun to invoke “purely artificial arrangements” in legal proceedings concerning interest deductions.  

We understand the Swedish Tax Agency's mission to combat tax evasion and purely artificial arrangements – but our hope is that the clarification in this judgment means that interest deductions in commercial transactions will not require as extensive processes to be approved in the future. 

For companies, it remains important to document the business reasons for internal loans, especially when there are differences in taxation between different countries within the Group. 

Link to the decision (in Swedish)