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Sweden investigates amendments to interest deduction limitation rules

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Maria Barenfeld and Sebastian Orre of KPMG Sweden explain how a special investigator is examining the need for amendments to the Swedish interest deduction limitation rules to ensure they comply with EU law.

In 2019 the Swedish corporate income tax system was subject to major changes with regard to the treatment of interest expenses. Based on the EU’s Anti-Tax Avoidance Directive (ATAD), Sweden introduced a new tax-specific definition of interest expense and interest income, as well as new EBITDA-based rules on general limitations on the deductibility of interest.

In October 2021, the Swedish government appointed a special investigator to review the Swedish rules on interest deductibility, in order to follow up on parts of the new legislation and propose necessary amendments. However, in April 2022, the scope of the investigation was substantially extended to include the targeted interest deduction limitation rules (the targeted rules), among other things.

The targeted rules have been subject to much legal debate as they, in practice, mainly target cross-border arrangements. Within Sweden, groups may generally consolidate through taxable or deductible group contributions (koncernbidrag).

However, in January 2021 the question of the Swedish rules’ compliance with EU law was finally subject to judgment by the European Court of Justice (CJEU). The CJEU examined whether the 2013 version of the targeted rules could be considered to be in breach of EU law (Lexel AB v Skatteverket, C-484/19, referred to hereafter as the Lexel case).

The Lexel case


In the Lexel case, a Swedish company (Lexel) had paid interest on a loan from a French group company. The interest was taxed by the French company at a rate of 34.43% on a consolidated basis (French group taxation) but was offset against consolidated losses within the tax group.

The Swedish Tax Agency (STA) denied Lexel’s claim for a deduction of the paid interest based on the targeted rules. According to the STA, the targeted rules should be disregarded if the relevant debt had been incurred mainly for tax reasons. The STA claimed this had been the case.

The CJEU initially concluded that Lexel and the French company would have been able to exchange group contributions, if both companies had been subject to tax in Sweden. Therefore, according to the CJEU, the application of the targeted rules was a restriction of the freedom of establishment. Furthermore, the CJEU found no justification for the restriction.

Notably, the Court held that the provision in the Swedish rules, that the debt should be incurred mainly for tax purposes, was not limited to such wholly artificial arrangements that may justify some restrictive measures. Based on the CJEU’s ruling, the Swedish Supreme Administrative Court (SAC) ruled in favor of Lexel in the domestic proceedings (HFD 2021 not. 10).

The Swedish government as well as the STA initially took the view that the CJEU’s conclusions in the Lexel case did not apply to the new wording of the targeted interest deduction limitation rule introduced in 2019. This is because the 2019 targeted rules set a higher threshold for the anti-abuse provision (“almost entirely” for tax reasons instead of “mainly” for tax reasons). Therefore, the targeted rules were left out of scope in the government’s instructions to the special investigator appointed in October 2021.

However, in December 2021, the SAC ruled that the Lexel case was also applicable to the 2019 rules (HFD 2021 ref. 68). In the light of this, questions have been raised concerning the current targeted rules’ compliance with EU law.

Therefore, according to the instructions, the targeted rules should be amended or adapted to comply with EU law. In addition, the investigator should analyse whether there should be an exemption for companies that can exchange group contributions.

Take-aways from the case


The instructions to the committee provide some insight on possible changes. There are several possible outcomes and potential proposals.

The investigator will present the final proposal by November 1 2023. It is not likely that the findings will result in new legislation before the end of 2023, considering the complexity of Swedish legislative procedure. This indicates that the current rules will remain in effect for a considerable time, despite their (at least partial) incompatibility with EU law.

Although we will have to wait for the rules to be amended, it is important to remember the CJEU’s statements in the Lexel case and the fact that EU law has precedence over Swedish national law.

Therefore, if circumstances arise that are similar to those in the above case rulings (HFD 2021 not. 10 or HFD 2021 ref. 68), it might be possible to get a deduction for certain intra-group interest payments, even if the wording of the current law might not allow it.

However, as there is not much certainty regarding the exact scope of the case law, we recommend making an open disclosure about such a deduction in the income tax return. This will mitigate the risk of Swedish tax surcharges (skattetillägg) if the deduction is not granted.

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