In March 2012, the Swedish Ministry of Finance proposed to extend the existing interest deduction limitation rules as a measure aimed at further protecting the Swedish tax base. See TaxNewsFlash-Europe: Sweden - Proposal to extend interest deduction limitation to all intra-group debt
During a consultation process, the proposal was criticized— primarily because it is regarded by tax professionals as unclear and legally “unsafe.” See TaxNewsFlash-Europe: Sweden - Consultation responses to proposal to extend interest deduction limitation rules to all intra-group debt
Subsequently, the government made what are described as “a few relatively minor amendments” to the proposal, in an apparent effort to address some of the concerns expressed. However, the proposal remains largely unchanged.
The Swedish government still proposes (as was proposed in March 2012) to extend the interest deduction limitation regime to cover all debts to affiliated companies. Thus, with these amendments, the rules would apply for all intra-group loans, unless one of the exceptions applies, thereby allowing the interest expense to be deductible:
- The recipient of the interest payment is subject to a tax rate of at least 10% (the “10% rule”).
- Both the loan and the related acquisition are primarily made for business reasons (the “business reasons test”).
Changes to exceptions
As originally proposed, the Swedish government intended to amend the “10% rule” to add a “reverse business purpose test,” which would apply if the tax authorities could show that the debt had been taken out primarily to obtain a significant tax benefit.
This proposal has been amended so that the exception provided under the “10% rule” would not apply when the debt relationship has been entered into primarily in order for the group to obtain a significant tax advantage. Thus, the shift in the burden of proof has been removed, and the exception to the “10% rule” would be more in line with the business purpose test.
The “10% rule” now would extend to apply for companies that are subject to the yield tax.
The proposal also continues to limit application of the business purpose test only when the recipient of the interest income is located in a country in the European Economic Area (EEA) or in a country with which Sweden has an income tax treaty for the avoidance of double taxation. This provision would mainly exclude loans from tax haven jurisdictions from application of the business purpose test.
Statute of limitations change
Under the original proposal, the Swedish tax authorities would have an extended period of six years (rather than two years) to raise enquiries in relation to the interest deduction limitation rules. The extended period has been removed, except in situations when incorrect or incomplete information has been provided by the taxpayer. Thus, the normal limitation rules would apply.
The interest limitation for back-to-back loans would continue to apply only for loans taken out to finance intra-group acquisitions of shares.
It is anticipated that the changes would be effective 1 January 2013. There is no grandfathering provision, and all existing loans would be covered by the proposal.
The government still expects that the changes will increase revenue income to allow for a future reduction in the corporate income tax rate.
Many of the concerns expressed during the consultation process have not been addressed. However, it is unlikely that there will be further significant changes to the proposed changes at this stage, before the rules’ effective date of 1 January 2013.
Tax professionals have observed that the government has indicated that the rules on interest deduction may change again in the future, after the findings of the corporation tax committee are finalized in 2015.
To read a June 2012 report, prepared by the KPMG member firm in Sweden: The Government proceeds with changes to the interest deduction limitation rules