Sweden Tax Alert - 20 September 2012
Budget proposals contain further restrictions on deduction of interest on intragroup debt
By Lars Franck, Thomas Andersson and Arian Sparrfelt
The 2013 Swedish budget presented to parliament on 20 September 2012 contains the final proposals on further restrictions to the deduction of interest on intragroup debt. This measure is designed to finance in part the expected loss of tax revenue following from the proposed lowering of the corporate income tax rate from 26.3% to 22%. The parliament likely will approve the proposals, meaning that the new legislation will be applicable as from 1 January 2013.
Notably, the government has indicated that the proposed rules may be temporary (applicable during 2013 and 2014), pending a government inquiry into the need for different rules to limit the deduction of interest on intragroup debt.
While the proposed measures are similar to the exposure draft submitted to the Council on Legislation on 8 June 2012, there are a few differences. The proposed legislation can be summarized as follows:
- The scope of the interest deduction restriction would be broadened to include all intragroup debt, regardless of the purpose or origin of the loan. The restriction currently applies only to interest expense on intragroup loans related to intragroup acquisitions of shares.
- An interest deduction is allowed under existing rules provided the corresponding interest income is taxed at a rate of at least 10% in the hands of the beneficial owner; if the 10% threshold is not met, the deduction still is allowed if the intragroup acquisition and the debt are both based on predominantly sound business reasons. These exceptions would remain under the proposed rules, but would be amended as follows:
- Even if the 10% threshold was met, a deduction would be disallowed if the main reason for the loan structure was for the group to obtain a substantial tax benefit. The burden would be on the taxpayer to demonstrate that this was not the main reason for the loan structure.
- If the 10% threshold was not met, a deduction would be allowed if the intragroup debt is based on predominantly sound business reasons. If the debt was related to an intragroup acquisition of shares, both the intragroup acquisition and the debt would have to be based on predominantly sound business reasons. Under the sound business reason test, consideration also would be given to whether the financing could have been made with a contribution rather than a loan. The proposals also suggest that the exception would not be applicable if the beneficial owner of the interest income was tax resident in a non-treaty country outside the EEA.
- The definition of a group would be broadened. Under existing rules, for example, a decisive influence between a lender and borrower is required to constitute a group, but under the proposed rules, a substantial influence would be sufficient to constitute a group.
- The proposed legislation contains an additional rule under which a partial deduction would be allowed for interest expense when the beneficial owner of the interest income was a company taxed on returns on pension funds (e.g. Swedish pension funds and life insurance companies) or a foreign company taxed in a similar way.