In 2009, the automatic right to deduct interest expenses for tax purposes was abolished to prevent certain tax planning involving interest deductions. Currently the interest deduction limitation covers debts to affiliated companies when the loan is issued to finance an acquisition of shares from another group company. Loans to finance external acquisitions are not caught by the rules. According to the Government, there are still a number of ways to use tax planning involving interest expenses to avoid a corporation tax charge in Sweden. To prevent an erosion of the Swedish tax base, the Government proposes to limit interest deductibility further.
The Government’s proposal can be summarized as follows:
- The interest limitation covers interest expenses on all debts to affiliated companies
- The exception under the ‘ten percent rule’ is not applicable if the Swedish Tax Agency (STA) can show that the debt has been taken out primarily to obtain a significant tax benefit (the so called ‘reverse business purpose test’)
- The STA has an extended period of six years (rather than two) to raise enquiries when applying the reverse business purpose test, even where no incorrect or incomplete information has been provided
- The ‘business purpose test’ is limited to recipients within the EEA or, in certain circumstances, in a state with which Sweden has a double tax agreement
- The interest limitation for back-to-back loans will continue to apply only for loans taken out to finance intra-group acquisitions of shares
- The scope of the rules is extended so that “controlling influence” is exchanged for “substantial influence” in the definition of affiliated companies
The proposal has now been subject to consultation and a large number of responses have been submitted. Virtually everyone is in agreement that the current rules need to change and that unwarranted interest deductions should not be allowed. However, the proposal has been subject to widespread disapproval.
The comments broadly convey the following messages:
- The proposal has significant shortcomings when it comes to legal certainty and predictability for the taxpayers and should therefore not form the basis for legislation
- It is not based on internationally accepted principles
- It is uncertain whether the proposal is in line with EU law
- The proposal gives the STA too much influence by granting a six year period to raise enquiries even where no incorrect information has been provided
- The Corporation Tax Committee is investigating the same question and the legislator should await the Committee’s findings
- It is unclear whether the internal finance companies of local councils are covered by the proposal
- The choice of capitalizing versus commerciality should not be subject to legislation without further investigation and fine tuning
- It is unclear whether cash-pooling is covered by the interest limitation
As an alternative to the current proposal, a number of review comments have suggested rules with a different construction, for example thin capitalization rules, alternatively EBITD-rules as in the Finnish proposal (which in simple terms deny deduction for interest on intra-group loans exceeding 30 percent of the borrower’s profit).
The STA has in its review comment proposed that the interest limitation on back-to-back loans should be extended to include all loans to affiliated companies, not just loans taken out to fund intra-group acquisitions of shares.
The survey of the STA concerning tax planning within the social services sector
At the end of 2011, the STA was given the task of conducting a survey to explore and analyze the existence of tax planning in companies within the social services sector. The assignment was primarily focused on tax planning involving interest deductions.
Recently, the Government extended the STA’s survey to also include companies within the same group as wholly or partly tax exempt legal persons (for example the AP-funds) and legal persons allowed a deduction for dividends paid (for example investment funds).
The STA has now published their findings in part – Tax planning with interest deductions within the social services sector. The final report should be published by 31 August 2012.