In June 2010 the Supreme Administrative Court ruled in the so-called Diligentia-case. In the Diligentia-case the Court tried whether the fact that the creditor and debtor were related parties should be considered when calculating an arm’s-length interest rate. The Supreme Administrative Court found that the credit risk in the Diligentia-case was lower than it would have been had the loan been made between unrelated parties. Accordingly, the agreed interest was not fully deductible. In its verdict the Supreme Administrative 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. Since the Diligentia-case concerned an intra-Sweden transaction only, it has been unclear whether the principles in the verdict apply also to cross-border situations. Based on the Diligentia-case, the Swedish Tax Agency published a position paper stating that also in cross-border situations loans from a parent company to a subsidiary in principle cannot be compared to external loans because of the insight and control a parent company is deemed to have in its subsidiaries.
In the case now at hand, the Administrative Court of Appeal has examined what constitutes an arm’s length-interest rate for a loan from a parent company in Luxembourg to its Swedish subsidiary. The Swedish Tax Agency defended its position by referring to the Diligentia-case. The Court concluded that there were no external loans in the Diligentia-case and, therefore, the parent company had full control over the subsidiary and could control additional borrowing and pledging. However, in the case at hand, the Court found that the external lenders have far-reaching control over the borrower’s business operations. Moreover, the business is covered by concession rules resulting in further restrictions in the borrower’s business operations. The Court stated that the fact that it is 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 the Diligentia-case deviate substantially from the facts in this case. Therefore the Diligentia-case has a limited value for the assessment in this case.
The Administrative Court of Appeal allowed deduction of the agreed interest rate of 13 percent, since the Swedish Tax Agency had been unable to show that the rate differed from what would be have been agreed between unrelated parties under similar circumstances.