The Tax Agency has stated that interest deductions equivalent to SEK 16 billion have been denied during 2015. Legal processes are expected as the rules involved are difficult to interpret. It is likely that future Swedish rules will be impacted by international regulations.
Since 2013, the right of deduction of interest expenses on loans from companies within a community of interests has been significantly limited. The major rule is that interest expenses are not deductible. However, deduction can be granted if the company can provide evidence that the interest income is taxed at least 10 percent with the “beneficial owner” of the interest income and provided the major reason for the debt relationship arising is not to achieve a significant tax advantage for the community of interests. In such a case, deduction is granted according to the so-called 10 percent rule. The right of deduction also applies (regardless of the taxation level of the final recipient) on the basis of the so-called valve, provided the debt relationship is commercially motivated. This, however, applies only if the final recipient of the interest income is located in either an EEA country or in a country with whom Sweden has a double taxation agreement. However, the current legislation continues to grant deduction of interest on liabilities held with external lenders.
The Tax Agency’s Report
During a number of years, the Tax Agency has had the assignment of mapping interest deductions and the impact of such deductions on the Swedish corporate tax base. This most recent report is a follow-up of the more restrictive change in the rules introduced in 2013. In the report the Tax Agency notes, amongst other things, the following:
- The Tax Agency has investigated at least 330 companies on the basis of the regulations in place. The majority of these were industrial companies, but municipality-owned companies were also investigated. Deduction of interest expenses was denied in a total amount of approximately SEK 16 billion, of which SEK 3 billion refers to loans from Swedish tax subjects (investment companies, the state, municipalities, non-profit associations and trusts).
- The companies experience the interest deduction regulations as difficult to apply. A major degree of uncertainty exists as to the manner in which the interest deduction rules are to be interpreted and applied as there is no legal guidance in terms of the central concepts in the legislation.
- Intra-group loans would appear to be decreasing which indicates that the legislation may have had a certain impact. At the same time, external lending has increased which implies that negative net interest remains at a high level. The Tax Agency’s assessment is that there is a requirement for rules which also cover external interest if the regulations are to achieve a more significant impact on the Swedish corporate tax base.
The Swedish interest deduction rules have been the subject of strong criticism as they are very difficult to interpret. The regulations place a heavy burden of evidence on companies who not only have to trace the origin of their liabilities but also, in certain cases, must make assessments of the various foreign jurisdictions’ tax laws regarding interest income. The scope of the Swedish laws will probably be the subject of a large number of court cases where the central concepts within the legislation will be tested. It can be added that Sweden’s interest deduction limitation rules have received criticism from the EU Commission who is of the opinion that the rules risk comprising a breach of the right of free establishment.
From a national perspective, the right of interest deduction’s future was subject to the investigation undertaken through the so-called Corporate Tax Committee. In previous articles we have noted that during 2015 the government announced that the proposals of the Corporate Tax Committee would be re-worked within the Government Offices and that new regulations would come into effect, at earliest, on 1 January 2017. Sweden’s future changes in regulations are also impacted by the work going on an international level. Both within the EU and within the OECD, there are proposals for changes in regulations to counter-act tax planning. Within the framework of OECD’s BEPS project (Base Erosion and Profit Shifting), a special report on, amongst other things, interest deduction in international groups was published under Action point 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments.
Consequently, Swedish companies with international operations, as well as tax-free subjects, such as municipalities, have reason to monitor both national and international developments in this area.
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