In 2009 the automatic right to deduct interest expenses for tax purposes was abolished to prevent tax planning using intra-group transactions to create interest deductions. Currently the limitation placed on the deduction of interest payments covers debts to affiliated companies when the loan is issued to finance an acquisition of shares (or similar ownership interest) from another intra-group company. There are two exceptions to this regime under which the interest expense are still deductable:
• If the recipient of the interest payment is subject to a tax rate of at least 10 percent (the ten percent rule); and
• If both the loan and the acquisition are primarily made for business purposes (the business purpose test).
The Government now proposes to extend the interest deduction limitation regime to cover all debts to affiliated companies. Thus, with the amendments the rules are in scope for all intra-group loans, regardless of the purpose of the loan. The reference to interest on loans issued to finance intra-group acquisitions of shares is removed.
Furthermore, the Government proposes to amend the ten percent rule with the addition of a reverse business purpose test. If the Swedish Tax Agency can show that the debt has been taken out primarily to obtain a significant tax benefit, the interest will not be deductible despite the fact that the corresponding interest income has been subject to more than ten percent tax.
Moreover, it is also proposed to limit the business purpose test to apply only where the recipient of the interest income is in the EEA or in a country with which Sweden has a double tax treaty. This will mainly exclude loans from tax havens from the business purpose test.
Consultation will now follow. It is proposed that the changes will take effect on 1 January 2013. There is no grandfathering provision and all existing loans are covered by the proposal.
The Government envisages that the changes will increase revenue income to pave the way for a reduction in the corporate income tax rate. More about the reduction of the corporate income tax rate will be announced in the Budget Proposal later this year.
Groups with Swedish intra group debt should review all their loan relationships to establish whether the limitation may be applicable.