The Swedish government appointed a committee to oversee the Swedish regulations regarding taxation of corporations in 2011. The purpose was to modify the tax regulations so that investments and entrepreneurship would benefit. The committee was also assigned to expand the taxation base for legal entities—the main purpose was to reduce tax differences between equity financing and debt financing.
In 2014, the committee presented a proposal to the Ministry of Finance, in which inter alia modified rules for deduction of negative net interest for corporates and a reduced corporate income tax were presented.
After four years of adjustments and comments from interested parties, the final proposed legislation was presented in 2018. The new rules apply as of January 1, 2019.
Limitations Regarding Deduction of Negative Net Interests
The new modified rules regarding interest deduction limit many companies’ possibilities to deduct interest expenses on intragroup and external loans. The rules can be summarized as follows.
Initially, a general rule of maximum 30 percent deduction of the income measure EBITDA (earnings before interest and tax, depreciation and amortization) is imposed.
The new rules permit an equalization of interest deduction capacity within a corporate group, provided that group contribution is allowed. If all the negative net interest cannot be used one year, the remainder can be saved and used another year if there is capacity that year. However, it can only be carried forward for a maximum of six years and cannot be saved if there is a change in ownership.
Instead of carrying out deduction of interest according to the general EBITDA rule, deduction can be made according to a simplified rule.
This rule is voluntary and means that deduction of negative net interest expenses can be made up to 5 million krona ($521,000) per corporate group. Compared to this, the EU directive (EU 2016/1164) recommends a deduction of maximum 3 million euros ($3.3 million) If one company in a corporation group uses the simplified rule, all companies within the group must also use this rule.
In order to prevent a reduction in building of rental housing, the depreciation for rental housing is accelerated. The new rules mean that an additional 2 percent deduction per year can be made in the first six years from the completion of the rental housing, which gives a total additional deduction of 12 percent. This means that the depreciation of a block of flats will be reduced.
In addition to the taxable EBITDA rule and the simplified rule, interest on related-party debt must also pass a specific anti-abuse provision, which (somewhat simplified) assumes that the debt financing has not been exclusively (or as good as exclusively) put in place for tax reasons.
This is rather similar to the former anti-abuse provisions, only with the difference that the denying of interest deductions now will require that tax benefits represent “the exclusive” reason (defined as 90–95 percent), whereas it is sufficient under the current rules if the tax benefits are deemed as “the predominant reason” (defined as 75 percent). There is however, so far, no guiding case law on how the weighing between tax reasons vs non-tax reasons should be made.
Lowering of the Corporate Income Tax Rate
Simultaneously with the conclusion to limit the deduction of interests, a decision to reduce the corporate income tax was also taken. According to the new rules the corporate income tax in Sweden will be reduced in two stages during the period 2019–21.
This will result in a final corporate income tax rate of 20.6 percent. For fiscal years that begin after 2018 but before 2021, the tax rate will be 21.4 percent, and for fiscal years that begin after 2020 the tax rate will finally be 20.6 percent.
- Examine the possibilities to convert part of loans into capital injections and thus reduce the interest expenses, and instead pay dividend.
- Use the group contribution rules to maximize the basis for EBITDA.
- Seek advise from a tax consultant to predict and calculate which interest expenses are deductible.
Sara Bengtsson is a Tax Associate, Markus Zung is Senior Tax Manager and Håkan Behmer is a Tax Partner, BDO Sweden.
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