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By Marcus Hoy
Corporate interest deductions worth 17 billion kroner ($1.9 billion) were denied during 2016, a report from the Swedish tax authority, Skatteverket, shows, up from 16 billion kroner for 2015.
The Jan. 11 report, which details the value of the deductions and their impact on the tax base, also summarizes the existing rules on interest deductions and details related tax law.
In a statement, the tax agency said amendments that restrict the deductibility of internal interest seem to have had the effect of reducing the tax planning.
Sweden introduced new rules designed to curtail the deductibility of interest on loans made between related companies in 2013. Under this regime, interest deductions can’t generally be permitted unless it can be demonstrated that the loan is predominantly motivated by business purposes.
A “10 percent rule” also applies, under which deductions can be permitted if the interest income would have been taxed at a rate of at least 10 percent as the sole income of the beneficial owner.
In a Jan. 11 statement, the tax agency said the 2013 measures appeared to have reduced corporate tax planning in Sweden. Overall, it said the value of corporate loans had fallen over the past four years.
While it was working to establish legal certainty in the area, the agency admitted that the interpretation of the 2013 rules remains unclear.
“There is some uncertainty about how the rules should be applied because legal practice does not yet exist” the statement read. “Uncertainty will persist until court cases have gone through all legal processes”.
In a Jan. 17 statement provided to Bloomberg BNA, Fredrik Gustafsson, senior counsel at DLA Piper in Stockholm agreed that the rules remained ambiguous. The report offered little in the way of new legal guidance, he added.
“It is hard to foresee how the rules should be applied in this area” he said. “I feel that there is a need for certainty, especially with respect to how the business purpose provision is interpreted in different situations.”
“When the rules were enacted in 2013, the finance minister stated that uncertainty would not be a problem since companies could receive advance rulings from the tax authority,” he said.
Gustafsson said that the Supreme Administrative Court has since however stated that in such cases, the facts are too uncertain to render advance rulings.
“Thus we will have to wait several years before there is sufficient case law to have clearer guidance,” he said.
He added that in some cases, the tax agency has taken “far-reaching positions” stating that the parent company should have provided equity instead of loans” he said.
“Sweden has no thin capitalization rules and there is a need for case law showing to what extent the companies have the freedom to choose between equity and debt when funding a subsidiary. Given the restrictions with respect to the payment of equity from Swedish companies under the Companies Act, there are situations where a significant difference exists between equity and debt.”
Gustafsson said the value of disallowed interest deductions in 2016 was unsurprising.
“We know that the value of interest payments that are affected by the rules is significant” he said. “The problem is not limited to international situations. It also affects, for example, companies owned by municipalities and real estate companies owned by insurance firms.”
The 2013 measures likely reduced companies’ total debt, the Tax Agency said, though only minor changes in internal and external corporate debt have been noted since 2008. If necessary, the Agency said, further legal changes could be introduced in the area.
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