Stricter rules on interest deductions
The Swedish Ministry of Finance has today proposed further measures aiming at preventing tax planning involving interest deductions.
The proposal essentially involves the following:
- The scope of the interest limitation rules from 2009 (described below) is proposed to be extended to cover all loans within a group, regardless of what the loan is used for. This means that the rules would also be applicable to loans used to fund external acquisitions.
- The so-called ten per cent rule is supplemented by a general exception. This exception means that the deduction is denied if the Swedish Tax Agency can demonstrate that the intra-group debt has predominantly arisen to create a significant tax benefit for the group. This applies even though the affiliated entity, being the beneficial owner of the interest income, is taxed at a rate of at least ten per cent.
- The business reasons exception (described below), which means that deductions for interest expenses are allowed, even though the beneficial owner of the interest income is not taxed at a rate of at least ten per cent, if the both the intra-group acquisition as well as the intra-group debt giving rise to the interest expenses are mainly supported by business reasons, is in the proposed rules amended to only apply in cases where the beneficial owner of the interest is domiciled within the EEA, or, under certain conditions, in a country with which Sweden has concluded a tax treaty.
- The amendments are proposed to enter into force on 1 January 2013 and the rules will apply to interest charges that are paid or accrued after 31 December 2012, regardless of whether the debt giving rise to the interest arose before that date.
As a general background, Swedish interest deduction limitation rules were introduced on 1 January 2009. These rules generally restrict the tax deductibility of interest expenses on intra-group loans, used to finance an intra-group acquisition of shares. However, the deduction is allowed if the interest income is subject to tax in the hands of the affiliated company, being the beneficial owner, at a rate of at least ten per cent (the ten per cent rule), or if both the intra-group acquisition as well as the intra-group debt giving rise to the interest expenses are mainly supported by business reasons (the business reasons exception).
In today’s press conference, where the proposal was presented, the Minister of Finance, Mr. Anders Borg, said that the proposed changes strengthen public finances by increasing the tax base in the corporate sector. The Ministry of Finance estimates that tax planning involving interest deductions on intra-group loans causes the state a shortfall of 6.3 billion SEK in taxes annually. According to Mr. Borg, the proposal is not aiming at increasing taxation of Swedish companies as such and he said that the proposed rules may enable a reduced corporate income tax rate.
The memorandum, in which the proposal is presented in detail, will now be sent for consultation and the consultative bodies have until 24 April 2012 to provide comments on the proposal.
In parallel with this proposal, the Corporate Taxation Committee (Sw. Företagsskatteutredningen) is reviewing and analysing how the deductions for interest payments, more generally, should be handled for corporate income tax purposes. The Corporate Taxation Committee shall present its final report no later than 1 November 2013.