Proposed new tax regulations for the corporate sector

On May 3rd, the Swedish Government presented its proposed bill for new corporate tax regulations to the Parliament. The proposed bill essentially corresponds to the proposal in the exposure draft, which the Government had presented to the Council on Legislation on March 21st, 2018. The proposal implies a limitation to interest expense deductions for companies, and at the same time a reduced corporate tax rate. The Parliament will decide on these new rules on June 13th and the rules are proposed to come into force by January 1st, 2019.

The major points of the bill:

• The Government’s proposal introduces, first and foremost, rules limiting the right to deduction of interests on both internal and external loans in the corporate sector. This limitation is based on a so-called EBITDA rule introduced in combination with a reduction of the corporate tax rate to 21,4 percent in 2019 and to 20,6 percent in 2021.
  
  The EBITDA rule means, mainly, that the right to deduction of the difference that arises when interest expense exceeds interest income, so-called negative net interest, is limited to the equivalent of 30 percent of taxable EBITDA.
• Negative net interest, which cannot be deducted according to the EBITDA rule, can be carried forward during a maximum period of six years.
• According to the proposal, it is possible to deduct negative net interest up to a maximum of SEK 5,000,000 without any limitation. This gives the result that due to the reduction of the corporate tax rate, the proposal will benefit companies with negative net interest of less than SEK 5,000,000.
• In addition to the central parts of the proposal regarding the EBITDA rule, the Government also proposes to restrict the current rules on limitation of interest expense deductions on intra-group loans. The current main rule implying that interest expenses on intra-group loans are not deductible, will now become more as an exception than a main rule. These rules will complement the EBITDA rule.
• The Government also proposes to introduce rules against so-called hybrid mismatches in order to hinder international tax planning.
• According to the proposal, general rules will be introduced for calculating the interest part in financial leasing agreements. In case the interest part is not specified in the leasing agreement, or if it is not market-based, the interest part is to be determined by a special calculation model.
• Furthermore, the bill includes a proposal that introduces a so-called primary deduction for rental houses. According to this proposal, further deductions for value depreciation, in addition to the ordinary annual deductions for value depreciation, will apply on expenses for newly constructed, extended or renovated rental houses. The additional deduction is to be divided on the basis of 2 percent of the expenses incurred per year, during the first six years after completion of the building.

Comments

After the Government had delivered its draft exposure to the Council on Legislation, the Council presented a statement concerning the proposal. The Council has, however, mainly proposed minor changes and clarifications of a legal technical nature. The proposal in the bill, therefore, corresponds in essence to the draft exposure presented to the Council on Legislation.

The proposed rules imply an adaption of the Swedish rules to the EU Directive and OECD’s recommendations. The purpose of the rules is to equalize the tax differential between borrowed capital and equity.

The proposal will primarily affect industries and companies that incur a relatively high level of debt. Furthermore, the proposal entails a greater administrative burden for many companies.

In practice, the proposal will entail many interpretation difficulties. Amongst other things, we see problems with calculating taxable EBITDA, defining negative net interests, managing tax losses carried forward when calculating taxable EBITDA and calculating the interest part in financial leasing agreements.

Therefore, all companies should now start analyzing how the proposal will affect them.

Tax matters will, of course, revert shortly with a number of analytical articles regarding this area.