Sweden introduces more stringent rules for deduction of interest

February 01 2013

Nils von Koch of KPMG explains how taxpayers can deal with the stricter approach to deduction of interest in Sweden.

Deductibility of interest

Rules restricting the deductibility of intra-group interest were introduced as of January 1 2009 to make tax planning, by way of interest deductions, more difficult. The Swedish Tax Agency has, ever since, been arguing that the restrictions must be more stringent to avoid a continuing erosion of the Swedish tax base.

More stringent rules restricting the possibilities to deduct interest paid to affiliated companies apply as of January 1 2013. The revised rules can be summarised as follows:

The main rule

The main rule is that intra-group interest is not deductible. Accordingly, the regime covers all debts to affiliated companies. Two exceptions apply to the main rule. These are the 10 % rule and the business reasons test rule.

The 10 % rule

Intra-group interest is deductible under the 10 % rule provided that the rightful recipient (beneficial owner) of the interest income is subject to a tax rate of at least 10 %. The 10 % rule does not apply if the principal reason (approximately 75% or more) for the debt relationship is to obtain a significant tax advantage.

The business reasons test rule

Where the 10 % rule does not apply, companies can revert to the business reasons test rule. The business reasons test rule applies if the debt relationship is made primarily for business reasons. This exception from the main rule applies only where the rightful recipient (beneficial owner) of the interest income is located in a country within the EEA, or in a country with which Sweden has concluded an income tax treaty for the avoidance of double taxation. In assessing whether the business reasons test rule is applicable, consideration must be given to whether funding could instead have been provided through a capital contribution from the company that holds the claim, or from a company that, directly or indirectly, through ownership or otherwise, has a significant influence in the borrowing company.

Back-to-back loans

Interest paid on external back-to-back loans is deductible, unless the loan has been used for the financing of intra-group acquisition of shares.

Affiliated companies

Companies are affiliated if one of them, directly or indirectly, through ownership or otherwise, has a significant influence over the other, or if the companies are under substantially common management.