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Pillar II - draft bill submitted to the Legal Council

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OECD and G20 have been working on a project within the Inclusive Framework regarding a global minimum tax (Pillar II) for a number of years. In December 2022, the EU adopted a directive formalizing Pillar II. By the end of 2023, all member states are required to have introduced national rules reflecting the directive, with the national rules to be applied from 2024. In February and March 2023, an initial proposal (“SOU”) and an addition (memorandum) to the Swedish rules for implementing the EU directive were published.

On August 31, 2023, the Swedish government submitted a draft bill detailing the implementation of the EU directive to the Legal Council. The recently approved draft bill includes certain news and interesting aspects, outlined below.  

Further reading for your perusal (in Swedish): 
Pillar II - enighet om EU-direktivet 
EU:s Pillar II-direktiv på väg att införas i Sverige 

The relationship between the OECD Guidelines and the application/interpretation of the Swedish rules

The draft bill specifies that the model rules, commentary, and administrative guidelines should constitute an important source of interpretation when applying the Swedish rules, to the extent that they are compatible with the EU directive and EU law. It is further emphasized that it is crucial for the substantive rules regarding top-up tax to be applied and interpreted in a uniform manner across EU member states.

Administrative guidelines were adopted in February and July 2023, and additional guidelines will be adopted in the future. The government states that the guidelines can be used to interpret Swedish legislation to provide clarifications and examples but not if they go beyond the scope of the legislation. This may lead to challenging assessments of whether the administrative guidelines are mere clarifications and examples or if they represent a "new rule" that goes beyond the scope of the current legislative project.

Treatment of deferred tax in relation to tax allocation reserves and excess depreciation

The draft bill includes a rule that limits how long a deferred tax liability can remain to be allowed to influence the tax cost. For assets not exempt from the rule, the time limit is set to five years, known as the “five-year rule”. If the relevant tax liability is not reversed within five years, the effective tax rate for the original year needs to be recalculated. The draft bill discusses how this impacts Swedish phenomena like tax allocation reserves and excess tax depreciation on assets.

The calculation of the top-up tax is based on the accounting principles applied by the parent company in its consolidated financial statement. For companies that prepare their consolidated financial statements according to IFRS, this means that appropriations in the form of tax allocation reserves and excess depreciation should be split between equity and deferred tax, as is done in the consolidated financial statement.

Since tax allocation reserves can be reversed at the latest by the sixth year after reservation, the government states that they may be subject to the aforementioned five-year rule. The government states that, for this reason, a tax allocation reserve may need to be reversed no later than the fifth year after its appropriation to avoid a recalculation of the effective tax rate under the rules for top-up tax. This means that the value of the allocation is limited in relation to what is permissible under the Swedish Income Tax Act (Swedish “inkomstskattelagen”).

Unlike tangible assets, intangible assets are not covered by the exceptions from the five-year rule. Regarding tax-related excess depreciation, these also constitute an item where deferred tax liabilities can potentially remain for more than five years. Since depreciation of both (certain) intangible and tangible assets are subject to a method called depreciation in line with the accounting, or the residual value depreciation method, and is done on a collective basis, it may be problematic for Swedish companies to demonstrate when a deferred tax liability has been reversed (as it is the company’s responsibility to show that a deferred tax has been reversed within the five-year limit). One solution discussed in the draft bill is for companies to consistently apply the 20 percent rule for acquired intangible assets. If the asset is depreciated linearly in the consolidated financial statement over ten years, the company can reasonably argue that the deferred tax liability has been reversed within the prescribed five-year limit.

Calculation of the substantial amount when applying the temporary safe harbour rule, Routine profit test

We have in an earlier Tax Matters article described the safe harbours that apply during the first three years. In the draft bill to the Legal Council, the government proposes some changes to the design of the safe harbor rule Routine profit test. Among other things, it is clarified that the increased percentages (initially 9.8 percent for personnel costs and 7.8 percent for tangible fixed assets) may be used in calculating the substance amount.

Further reading for your perusal (in Swedish): Pillar II - Rapport från OECD om lättnadsregler 

Definition of “entity” is changed

In the administrative guidelines from the OECD published in February 2023, a clarification of the term “entity” was made. In the draft bill to the Legal Council, this clarification is incorporated into the legislation on top-up tax. This means that public entities, i.e. state or regional authorities, are excluded from the law as they do not fall within the definition of an entity.

Exempted entities

Government entity

A government entity refers to an entity exclusively owned by a public authority. The entity may not engage in trade or business activities and should primarily have the purpose of fulfilling public administrative duties. The government clarifies that this term includes activities that a municipality or region has a public law responsibility to carry out, such as public transportation.

Investment companies

The SOU included an explicit exemption for investment companies. Some of the reviewing bodies questioned this explicit exemption, arguing that investment companies were already covered by the definition of investment funds. In the draft bill to the Legal Council, the government now states that it concurs with the assessment that no separate legislation is required for investment companies beyond the exemption for investment funds.


The implementation of Pillar II and minimum taxation should be in place by the end of the year. The nearly 900-page long draft bill to the Legal Council presents a comprehensive proposal for what this tax should look like and how it should be handled from a Swedish perspective. The bill does not contain many new elements in relation to previous proposals but still includes some interesting aspects.

The bill discusses, among other things, the relationship between the OECD's published guidelines and the application/interpretation of the upcoming Swedish rules, as well as how deferred tax related to tax allocation reserve and excess depreciation is affected by the so-called five-year rule for deferred taxes. Certain relevant terms in the upcoming Swedish legislation are also clarified. It is also proposed that the rules on representative liability should apply. However, there are still some unanswered questions and issues in the area particularly regarding goodwill arising in an asset acquisition that is not subject to depreciation under IFRS.

The proposed regulatory framework is complex and will require decisions to be made on challenging issues of application. In addition, international work is ongoing, and, for example, the issue of what permanent safe harbour rules should look like is still being discussed. The government also states in the bill to the Legal Council that it is likely that further legislative proposals will be introduced in the future.

Would you like to learn more?

PwC has a dedicated focus group specializing in Pillar II and assists many groups with questions related to the regulations.

Contact us

Anna Romby & Ottilie Kaufeldt

Anna Romby & Ottilie Kaufeldt

Anna Romby och Ottilie Kaufeldt work with national and international corporate taxation at PwC.

Anna: 073-860 17 60, anna.romby@pwc.com

Ottilie: 010-212 45 50, ottilie.kaufeldt@pwc.com

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