Sweden must as a member of the European Union implement the Anti-Tax Avoidance Directive (ATAD) by 1 January 2019. This will probably be the biggest change in the Swedish tax legislation for corporates in many years and most of the larger companies will be effected. On 14 June, the Swedish parliament approved the Government bill re the implementation into Swedish tax legislation. Below is a description of the most important changes.
The rules mainly concern how interest expenses may be deducted. The first question is thus how interest expenses should be defined and what expenses and income that will be subject to the new rules. Although there is no real definition of what should be considered interest under current Swedish tax law, it is clear that the definition of interest expenses that now is introduced includes more types of expenses. In general, interest expenses under the new rules should be in line with how interest is defined in ATAD and OECD's BEPS reports. Moreover, Swedish GAAP can be used as guidance of what is deemed interest expenses. Interest expenses includes interest and other costs for a loan. It will also include costs that can be deemed comparable with interest. Examples of what could be other costs for a loan can be guarantee fees for a loan or break funding costs. What can be deemed expenses comparable to interest are for example costs for interest swap agreements. This would not include costs on any swap agreements to hedge the prices on commodities. What exactly should be deemed interest expenses, will eventually be determined by case law. Initially, there will be many different kind of expenses that there will be an uncertainty around and we recommend that all companies analysis what of their expenses potentially could be caught by the rules.
There is basically no other guidance what should be deemed interest income other than that the Government in its bill states that decisive for what is an interest income is whether a corresponding expense at the hands of the recipient would have been defined as an interest expense.
It should also be noted that the interest component in financial lease agreements should be treated as interest. To the extent there is no interest component calculated in the agreement, rules to determine a reasonable interest is introduced.
There is under current Swedish tax law interest deduction limitation rules for certain related party debt. These rules are now amended and will in general be more generous. Under the new rules, interest deduction on such debt should be granted if the beneficial owner of the interest income within the group (i) is resident within the EEA, (ii) is resident of a state with which Sweden has a tax treaty not limited to certain income or (iii) is subject to a corporate tax of at least 10 per cent. However, no tax deduction should in any case be granted if the underlying purpose with the loan exclusively or as good as exclusively (90-95 per cent or more) is to obtain a substantial tax benefit for the group. Please note that interest expense to an affiliated party that is deemed nondeductible, would not be included in the calculation of the net interest expenses but simply be a non-deductible cost.
When the interest income and expenses are defined, you calculate the company's net interest expense/income to see whether the expenses would qualify for tax deduction.
A general "taxable EBITDA" based interest deduction limitation will apply, where the cap is 30 per cent of the taxable earnings before interest, tax, depreciation and amortization (EBITDA). The limitation applies to net interest expenses.
The "taxable EBITDA" is calculated after adjustments of the book income for non-deductible costs and non-taxable income, deduction for tax losses, group contributions etc. Please note that a partnership income should not be included in the taxable EBITDA, neither would movements in tax allocation reserves.
The rules apply per company (per legal subject) and thus, calculations cannot be made based on consolidated amounts within the group. However, equalization of interest deduction capacity within a group is possible by way of group contributions, i.e. taxable profits may be transferred from one company to another, provided they qualify for the group contribution requirements. Group contributions are normally made with an amount equal to the net taxable income, i.e. after tax deductions including tax depreciations. Hence, a group will often lose some headroom for interest deductions if the taxable profits are not in the same company as the net interest expenses and the taxable profits are transferred through group contributions.
Net interest income in a company can be set-off against net interest expenses in another company, provided that the companies qualify for Swedish group contributions.
Unutilized interest deduction capacity can be carried forward for up to six years, but is lost in the event of a change of control that is not intra-group.
In brief, tax losses from prior years not used one year, would not have effect when calculating the headroom for tax deductible interest under the EBITDA rule. Hence, it is not neutral in which company in a group tax losses are located.
Net interest expenses of up to SEK 5 million per group may be deducted without applying the EBITDA rule. The group definition generally follows Swedish company law but partnerships are always included irrespective of ownership percentage. The 5 million deduction may be interesting to apply also for groups with higher interest expenses in a number of situations, for example when net interest expenses carried forward could be lost due to change of control of a company.
The new rules are proposed to enter into force on January 1, 2019, applying to financial years commencing after December 31, 2018.
It can be noted that Sweden will not apply any grandfathering provisions, nor introduce any form of group ratio rule. However, eventually an exemption for interest expenses relating to government infrastructure projects may be introduced. Many companies as well as municipalities have asked for such exemption. The Finance minister has stated that they will be reviewing whether such exemption can be introduced but due to the tight timeline for implementing ATAD, they are not able to present a concrete proposal at this stage.
The corporate tax rate is reduced in two steps, from the present 22 per cent to 21.4 per cent for financial years commencing after December 31, 2018 and to 20.6 per cent for financial years commencing after December 31, 2020. The change in tax rate, should be also observed for accounting purposes when calculating deferred tax.
The new legislation also contains anti hybrid rules to prevent double deduction for interest expenses in two different jurisdictions. Sweden must also amend its current CFC legislation to be compliant with ATAD. Such amendments are not part of the law that has been passed. The Government has presented its proposal, which recently was sent to the Swedish Council on Legislation for its review. No major changes of the CFC rules are required but the number of white-listed jurisdictions will be reduced and what kind of income that may be caught by the rules for many countries extended. When the final proposal is issued, we recommend that Swedish companies with subsidiaries abroad, investigate whether the amended CFC rules could affect them.