Global Tax Alert | 2 June 2014

Swedish National Tax Board issues rulings on application of interest limitation rules

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Sweden’s National Tax Board recently published three advance rulings on the application of the current interest limitation rules, which entered into force 1 January 2013. All three rulings have been appealed to the Swedish Supreme Administrative Court.

Under the current interest limitation rules, interest expense on intercompany debt is non-deductible as a general rule. The rulings test the interpretation of the two exceptions to the main rule: (i) the 10% rule, and (ii) the business reasons exemption.1

Ruling 2014-04-16 (dnr 38-13/D)

Background

A municipality (which is not subject to tax) provided a number of loans out of its excess liquidity to a wholly-owned treasury company. The treasury company subsequently on-lent the funds to other subsidiaries of the municipality for the financing of various construction investments.

Decision from the ruling committee

Since municipalities are not subject to tax, the Committee concluded that the 10% rule could not be applicable.

Whereas the Committee argued that lending out of excess liquidity could represent one indicator of a business reason, it nevertheless concluded that the loan should not be considered as being based predominantly on business reasons. The Committee argued in this instance that the loan hypothetically could have been replaced by equity financing, based on a specific provision in the law. The fact that a future repayment of an equity contribution (as opposed to the repayment of a loan) would be subject to company law requirements on value transfers was not considered to change the conclusion of the Committee.

In this context it is worth noting that in a previous ruling (2013-06-28, dnr 111-12/D), also regarding on-lending from municipalities - business reasons were deemed to be at hand, and no requirements of equity financing were raised when the on-lent funds were ultimately sourced from an external loan.

Ruling 2014-04-16 (dnr 71-13/D)

Background

In the context of an intercompany restructuring, a Swedish company borrowed funds from its parent in order to acquire group company shares, trademarks and to finance an equity contribution to a subsidiary. For one of the intercompany acquisition of shares, the transferor had acquired the shares from a third party shortly prior to the intercompany transfer. The receivables were subsequently contributed to a newly incorporated foreign treasury company.

Decision from the ruling committee

Without going into the details about whether the facts at hand should be considered to represent business reasons or not, the Committee concluded that based on the background of the loans and the subsequent contributions of the receivables, the loans could hypothetically have been replaced by equity financing. Consequently, the loans were not considered as being based predominantly on business reasons, thus rendering the business reasons exemption not applicable.

The committee also concluded, with reference to existing case law, that the rules at hand should not represent an infringement of EU law, since deductibility would not require that the beneficial owner of the interest income be resident in Sweden.

Ruling 2014-04-29 (dnr 80-13/D)

Background

Upon the implementation of a joint venture agreement, a Swedish company acquired 49% of the shares in a joint venture entity from a third party. The consideration was paid through the assumption of the seller’s existing payable towards a Belgian affiliate of the Swedish buyer.

The affiliated Belgian creditor benefitted from so called notional interest deductions (NIDs). The ruling request addressed the extent to which the Swedish borrower should be entitled to deduct the interest under the 10% test, if the Belgian creditor, through adjustments of its NIDs, would be subject to an effective tax rate in Belgium of either (i) 13%, or (ii) 22% (corresponding to the Swedish CIT rate).

Decision from the ruling committee

The ruling committee concluded that the beneficial owner of the interest income in both situations would be subject to an effective tax rate exceeding 10% thus passing the first element of the 10% rule.

The committee however also concluded that an effective tax rate of 13% combined with the fact that the level of debt of the group as a whole would not increase should be considered to create a significant tax benefit, whereby the tax payer would fail to meet the second requirement under the 10% rule. To the extent that the effective tax rate instead would be 22% (i.e., equal to the statutory Swedish tax rate), no tax benefit should be considered to be at hand, whereby deductibility in Sweden should be granted.

The committee also concluded, with reference to existing case law, that the rules at hand should not represent an infringement of EU law, since deductibility would not require that the beneficial owner of the interest income be resident in Sweden.

Endnote

1. For further details on the current regime on interest deductions, see EY International Tax Alert, Tightened Swedish interest limitation rules and lowered CIT rate approved by Parliament, dated 26 November 2012.

For additional information with respect to this Alert, please contact the following:

Ernst & Young AB, Stockholm
  • Erik Hultman
    +46 8 520 594 68
    erik.hultman@se.ey.com
  • Rikard Strom
    +46 8 520 592 08
    rikard.strom@se.ey.com
Ernst & Young LLP, Scandinavian Tax Desk, New York
  • Martin Norin
    +1 212 773 2982
    martin.norin@ey.com

EYG no. CM4454