The so-called Swedish targeted interest deduction limitation rules on intra-group loans (the Targeted Rules) are set forth in Chapter 24, sections 18 and 19 of the Swedish Income Tax Act (ITA).
The Swedish Supreme Administrative Court (SAC) has previously, in the legal case HFD 2021 ref. 68, decided that denying interest expenses because the debt almost exclusively has arisen in order for the group to obtain a significant tax benefit (the Exception Rule; Chapter 24, Section 18, paragraph 2, ITA) is in breach of the freedom of establishment in the Treaty on the Functioning of the European Union when it is applied to interest payments to companies in other member states if the companies would have been covered by the provisions on group contributions had both companies been Swedish.
However, on January 22 2024, in a case in which KPMG represented the applicant, the SAC concluded that the second rule, which covers debts relating to intra-group acquisitions of shares (the Acquisition Rule; Chapter 24, Section 19, paragraph 1, ITA), also constitutes a restriction of the freedom of establishment that cannot be justified in a corresponding situation.
As discussed further below, the reasoning in the ruling could potentially be applied more broadly and in other situations.
An important ruling from the SAC
The circumstances of the case are, in short, as follows. Swedish company A (the Company) is a wholly owned subsidiary of E and part of an international group. The group has a need to increase visible equity in legal entity E, which can most easily be achieved through a restructuring that includes a number of intra-group transactions exceeding book value. As part of this restructuring, the Company will acquire all the shares in B from group company C. The acquisition will mainly be financed by A receiving a loan from group company D, which is established in another country within the EU. The terms of the loan, including the interest rate, will be market based.
The Company asked the Swedish Board of Advance Tax Rulings if interest deductions for the loan could be denied because of the Targeted Rules. The board considered that it would be in breach of the freedom of establishment to deny interest deductions. The Swedish Tax Agency appealed the decision regarding the Acquisition Rule to the SAC.
According to the Acquisition Rule, if a debt to a group company relates to an acquisition of shares from another group company, deductions may only be made if the acquisition is significantly commercially justified.
With reference to the legal cases HFD 2022 ref. 49 and HFD 2011 ref. 90 I–V, the SAC considered that A's acquisition of B is not significantly commercially justified because it is prompted by “internal organisational reasons”. The interest expenses are thus covered by the Acquisition Rule.
The SAC has subsequently tested whether it would be in breach of EU law to refuse the interest deductions.
The SAC found that it would be in breach of the freedom of establishment to deny the interest deductions. The court considered that although there is no mention of tax benefits in the provision, according to the preliminary works the provision is not intended to cover interest payments where the group does not obtain a tax benefit. Because of this, the provision was assessed in the same way as the Exception Rule, which has previously been found to be in breach of the freedom of establishment when the companies would have been covered by the provisions on group contributions if both companies were Swedish.
The SAC therefore ruled that deductions for the interest expenses should be allowed.
Commentary on the SAC’s decision
KPMG welcomes this guidance from the SAC regarding the Acquisition Rule, which is highly valuable for many companies, especially considering that there have been very limited chances of meeting the requirements set up by the SAC for an acquisition to be considered significantly commercially justified according to Swedish law.
The ruling is of great importance for companies planning a restructuring; however, there are still questions regarding the regulation where further guidance is needed.
In addition to the clarification regarding the freedom of establishment, the SAC has expressed through the ruling that when applying the Targeted Rules according to Swedish law, they must be interpreted based on the purpose of the regulatory system – regardless of the wording in the provisions. The Targeted Rules have the purpose of minimising tax planning with interest deductions, and for this reason the SAC has stated that in purely domestic situations where the companies are covered by the provisions on group contributions, interest deductions should not be denied.
From this ruling, it could therefore also be argued that even if the companies are not covered by the group contribution provision, but there is no tax benefit for the group, deductions should be allowed, according to Swedish law.
