Proposal for prohibited deduction of interest expenses on certain subordinated loans

The Ministry of Finance has proposed a change in these regulations that will affect, amongst other entities, banks and insurance companies. This change refers to the prohibition of deduction of interest expenses on subordinated debt instruments being used for capital cover purposes.

Certain financial institutes, such as banks and insurance companies, are obliged to maintain a certain capital base to cover losses arising due to the credit risks, market risks and operational risks to which they are exposed. The requirements as regards the amount and composition of the capital base are determined primarily based on the EU Directive. This Directive provides the financial institutes with the possibility of including certain subordinated loans in their capital base. It is the interest expenses on such loans which the Government now proposes to make non-deductible.

In the proposed rules, there is direct reference to the EU Directive in question. This change in the regulations will affect banks and other credit institutes, securities companies, the Svenska Skeppshypotekskassan (government agency assisting with the financing of Swedish shipping), certain fund companies, payment management institutions, certain AIF managers, insurance companies and equivalent foreign companies.

In its memorandum, the Ministry of Finance states that the purpose of the change in regulations is to provide financial institutes a greater incentive to increase their solidity through neutralising the tax advantage currently incurred on subordinated loans used for capital cover, compared with using the company’s own capital for those purposes. However, the change in law aims primarily at increasing taxation of the finance sector, a sector which the Government currently deems to be under taxed. The proposal is expected to increase tax revenues per year by approximately SEK 1.4 billion.

The proposal has been sent for consultation and is proposed to come into effect on 1 January 2017.

Comments

The Corporate Tax Committee proposed similar changes in June 2014 (SOU 2014:40). The change in the law implies a stronger link between the taxation of the financial institutes and the manner in which they finance their operations.

Lennart Staberg and Alexander Sjöwall