Sweden has had targeted interest deduction limitation rules (the Targeted Rules) in various forms since 2009, and in 2019 general EBITDA-based interest deduction limitation rules (the General Rules) were introduced.
In 2021, the Swedish government appointed a commission of inquiry to review the Swedish General and Targeted Rules and in May 2024 the commission presented its report, which contains several proposals for changes.
The main proposed changes
The main proposed changes to the General Rules are the following:
Companies with the possibility to equalise profits under the rules of group contributions will form a ‘calculation unit’ calculating a joint net interest and a joint deduction basis (tax EBITDA). Each company will calculate its own net interest and deduction basis. These items are then totalled with the other companies’ corresponding items in the calculation unit. A company's deduction for negative accumulated net interest income may not exceed its own negative accumulated net interest income.
Negative net interest from previous years will affect the current financial year’s net interest (the accumulated net interest income).
Negative net interest can be carried forward indefinitely; i.e., the time limit of six years is abolished.
The amount limit under the safe harbour rule is increased from SEK 5 million to SEK 25 million.
All associated companies must apply the same rule; i.e., the EBITDA-based rule or the safe harbour rule.
Considering the commission's assignment, a limited exemption from the General Rules for interest on loans financing infrastructure projects was presented. However, the commission does not consider that such an exemption should be introduced.
The main proposed changes to the Targeted Rules are the following:
Exemplification of situations in law when a debtor could be entitled to interest deduction even if the debt has been created exclusively or almost exclusively to gain a substantial tax benefit for the associated companies. This is based on the developments in current case law where EU law has been invoked to claim an interest deduction. The exemplifications refer to situations where loans are taken from group companies in other member states and where the companies have a common parent company in a member state.
Deductions should always be denied when the Swedish Tax Agency can demonstrate that the debt is part of a wholly artificial arrangement under the EU anti-abuse principle and the debt has been incurred exclusively or almost exclusively to gain a substantial tax benefit for the associated companies.
A ban on interest deductions for loans financing internal share acquisitions is introduced. The proposed ban has only two exceptions: when the borrower can show that the internal acquisition is directly related to, and caused by, an external acquisition or that the debt has been incurred as part of an intragroup restructuring in preparation for an external share sale, and there is a need for temporary financing.
KPMG Sweden’s comment
The proposal suggests a new system for calculating the possible interest deduction allowed. The joint calculation will generally be more advantageous for groups compared with what applies today. Furthermore, the increased deduction limit under the safe harbour rule, up to SEK 25 million, is favourable.
A central coordination of a group’s interest deductions will be necessary due to the joint calculation within a calculation unit and since all associated companies must apply the same rule (the EBITDA-based rule or the safe harbour rule).
For companies within a calculation unit, it will be important to assess how the interest deductions should be allocated between the companies for the current year and for future years, in the event of a potential reassessment of the previous year’s calculations. In connection with acquisitions and disposals of group companies, this will entail new requirements for regulation in share transfer agreements, etc.
The proposed Targeted Rules remain complex, with several selective assessment parameters. The actual meaning of the terms "wholly artificial arrangement" and "exclusively or almost exclusively to obtain a significant tax advantage" is unclear, which creates legal uncertainty.
The commission seems to be of the opinion that the Targeted Rules can only come in conflict with the freedom of establishment in EU law. If the rules could also be in conflict with the right to free movement of capital, which is discussed, further amendments to the Target Rules would be necessary as regards the possibility of deduction on debt to lenders located outside the European Economic Area.
If the proposed ban on interest deductions for loans financing intragroup share acquisitions becomes reality, it will make commercial intragroup restructuring more difficult and give companies less flexibility.
The proposal is submitted for consultation and work on the proposal will continue in the Ministry of Finance.
