The court noted that its June 2010 decision (Diligentia AB) has a limited value in the present case because the conditions in Diligentia deviated substantially from the facts of this case.
In June 2010, the Supreme Administrative Court in Diligentia AB [PDF 27 KB (Swedish)] addressed whether the fact that the creditor and debtor were related parties was to be considered when calculating an arm’s length interest rate.
In Diligentia, the Supreme Administrative Court found that the credit risk was lower than it would have been had the loan been made between unrelated parties. Accordingly, the agreed amount of interest was held not to be fully deductible.
In Diligentia, the court stated (among other things) that a loan from a parent company to a subsidiary has certain characteristics that affect the credit risk and thus the interest rate—characteristics that are absent when the parties are unrelated.
Tax agency’s position after the decision
Since the Diligentia case concerned an intra-Sweden transaction only, it was unclear whether the principles in the decision also applied to cross-border situations.
Based on the court’s decision in Diligentia, the Swedish tax agency published a position paper stating that in cross-border situations, loans from a parent company to a subsidiary cannot, in principle, be compared to external loans because of the insight and control that a parent company is deemed to have in its subsidiaries.
In the recent case, the Administrative Court of Appeal examined what constitutes an arm’s length rate of interest for a loan from a parent company in Luxembourg to its Swedish subsidiary.
The Swedish tax agency defended its position by referring to the decision in Diligentia. The court, however, noted that there were no external loans in the Diligentia case, and therefore that the parent company had full control over the subsidiary and could control additional borrowing and pledging.
However, in the present case, the court found that the external lenders had far-reaching control over the borrower’s business operations. Moreover, the business was covered by concession rules resulting in further restrictions in the borrower’s business operations. The court stated that the fact that this was an intra-group loan does not mean that the loan is equivalent to a loan granted against collateral. Further, the court found that the conditions in Diligentia deviate substantially from the facts in this case, and that Diligentia had limited value with respect to the assessment in this case.
The Administrative Court of Appeal allowed deduction of the agreed interest rate of 13% in this case, finding that the Swedish tax agency had been unable to show that the interest rate differed from what would be have been agreed between unrelated parties under similar circumstances.
Tax professionals in Sweden believe that this decision is a favorable result supporting the arm’s length principle and that it is in line with how other countries apply this principle.
For more information, contact a KPMG tax professional in Sweden:
+46 (0)8 723 96 19
+46 (0)8 723 96 05
Read this November 2012 report prepared by the KPMG member firm in Sweden: Is the Diligentia-case’s time of fame over?