In her budget speech, Finance Minister Magdalena Andersson said corporate tax changes are being announced that will enter into force from July 1 2018 and will “improve neutrality between financing with equity capital and debt capital as well as counteract tax planning using interest deductions”. The measures include cutting the corporate tax rate by two percentage points and introducing measures to align domestic rules with the OECD BEPS project and the EU’s Anti-tax Avoidance Directive (ATAD).
To the dismay of the aviation sector, however, Andersson also announced a new tax on air travel, but she justified the tax as one that will help reduce emissions. “Unlike other modes of transport, no fuel tax or other environmental taxes are currently imposed on aviation,” Andersson explained.
Annika Lindström, a transfer pricing partner at KPMG in Stockholm, told International Tax Review that the tax proposals were as expected, but the government left out proposed changes on the taxation of closely held companies, which were previously announced but received a lot of criticism. “Overall, there were no surprises contained in the proposals, but the government has also stated its intention for more material changes in the near future,” Lindström said.
While the budget was not great news for businesses, the finance ministers offered several giveaways to individuals and domestic companies – the most important category in a pre-election year. She announced that the taxation of employee stock options will be amended to help businesses retain employees and social security contributions will be reduced for new companies, as well as the child allowance being increased, the tax gap between pensions and wages being gradually phased out between 2018 and 2020, and the tax for trade union membership fees being reduced, among other changes.
“It is a typical pre-election year budget, with substantial investments and close to SEK 6 billion in tax cuts,” said Ebba Perman Borg, head of tax at Linklaters in Stockholm. “In some ways it’s a typical left-wing oriented budget with reduced tax for pensioners, proposed tax deductions for union membership fees and increased child allowance. At the same time, the government is proposing significantly increased police and military budgets, which would typically be seen as right-wing investments.”
Most people have found the budget to be quite generous, but the right-wing opposition has criticised the government for over spending.
Corporate tax amendments
Andersson’s statement on corporate tax changes refers to the government’s proposal in June 2017 to implement BEPS measures and the EU amendments to the ATAD (ATAD II).
The finance minister said in the budget bill that the proposals would be submitted to Parliament in early 2018, once the consultation period on certain measures ends later this month, with the intention of bringing them into force on July 1 2018.
The changes that will be introduced include:
A new and general interest deduction limitation rule linked to either earnings before interest and tax (EBIT), or earnings before interest, tax and amortisation (EBITDA) (parallel proposals under consultation);
A narrower application of the current interest deduction limitation rules;
Reducing the corporate income tax rate from 22% to 20%; and
Introducing rules on hybrid mismatches and financial leasing.
“The proposed general interest deduction limitation rules will in particular have a negative impact on sectors and businesses that are heavily debt financed, such as the real estate sector,” said Borg. “For such sectors, the proposed reduced corporate income tax rate would unlikely make up for the loss in interest deductibility.”
“In addition to the general interest deduction limitation rules, which are not included in the budget bill, the government has previously this year proposed increased taxation of real estate transactions,” Borg added. “Under the proposed rules, which were presented in March 2017, indirect transfers of real estate will be taxable, such transactions currently being tax exempt where the participation exemption regime applies. The rules on increased taxation of real estate transactions have been proposed to enter into force on July 1 2018, but were not included in the budget bill.”
Discussing the corporate tax rate cut, KPMG’s Lindström said this, at face value, is “great news” for Swedish corporations and for Sweden in general when it comes to attracting foreign businesses. She added that with the trend to cure such rates, this is something that corporations should review at a group level.
“The expected cut will however be accompanied by less generous rules for interest deductions,” Lindström continued. “Such measures are largely the implementation of commitments made by Sweden as part of their membership of outside organisations (i.e. the EU and OECD) so they are changes that we have known were coming for a while, so it is good to now have the details from the government of how they propose to implement these in Sweden.”
Aviation industry hurt
The proposals for a tax on air travel was one of the biggest tax changes announced in the budget and it has not been welcomed.
“The proposal has been massively criticised for causing smaller airports to close and negatively impacting Sweden’s competitiveness on the international market,” said Borg.
The proposal is aimed at reducing the amount of air travel, thus helping to cut emissions. However, Borg described this as a pipe dream until there are other viable options to travel to other countries around Europe in particular. “The intention of the government is to reduce the air travel, or at least reduce the ever increasing air travel. However, given that Sweden is far away from mainland Europe, there are currently no realistic alternatives to going by air.”
Aviation companies will have to bear the cost on the tax when it applies from April 1 2018, which will be taxable at rates of SEK 60, 250 or 400 depending on the length of the flight. “The tax is to be paid for passengers travelling from an airport in Sweden in any aircraft approved for more than 10 passengers,” Lindström explained. “This is a cost that is likely to just be passed onto consumers, making flying more expensive. Sweden is not really a ‘hub’ destination, so the effects will likely mostly be limited to a reduction in demand for flights. This said, Sweden is a very large (from north to south) country, and as such there is sometimes no choice but to fly.”
The government is hoping the budget will boost their popularity among voters as they prepare for the general elections in September next year. Until then, Parliament will be debating the budget bill and subsequent corporate tax proposals that will adjust the tax rules over the coming year.
