This is the second court decision in recent years concerning arm’s length interest on intercompany loans. In June 2010, the Supreme Administrative Court rendered its judgment in a case in which both lender and borrower were members of the same group of companies, finding that this relationship would influence a determination of what is the arm’s length rate of interest.
In that case, the court found that the credit risk was lower than would have been the situation if the parties had been unrelated. As a consequence, the interest paid on the shareholder loans was not fully deductible.
Interest on loan from foreign parent company to Swedish subsidiary
In the instant case, originally two loans were the subject of the dispute:
- One between a Swedish subsidiary and its foreign parent company
- The other between the subsidiary and a minority shareholder in the subsidiary
The Swedish tax agency asserted that the 2010 decision applied in this case for purposes of determining arm’s length interest rates in cross-border situations, and that the arm’s length interest rate was 8% for both loans.
The lower court agreed with the Swedish tax agency’s position concerning the shareholder loan, but found that the tax agency had not met its burden of proof regarding the loan from the minority shareholder.
The company appealed, and the Swedish Administrative Court of Appeal concluded that the Swedish tax agency had failed to meet its burden of proof and that there were no grounds for a tax adjustment.
Read a December 2012 report prepared by the KPMG member firm in Sweden: New judgment regarding arm’s-length interest on shareholder loans
Contact a tax professional with KPMG's Global Transfer Pricing Services.