Proposed changes to the targeted interest deduction limitation rules

The current Swedish rules on the deductibility of interest expenses, referred to as the interest deduction limitation rules, were implemented in their present form in 2019. At the time of implementation, the government indicated that the impact of these rules would be reviewed. The Swedish government has now proposed changes to the targeted interest deduction limitation rules through the bill "2025/26:20 Amendments to Interest Deduction Rules in Compliance with EU Law,". The proposal includes, among other things, an alignment with legal developments within the EU regarding the deductibility of interest on loans within a community of interest. The new regulations are proposed to take effect on January 1, 2026.

The proposals are based on the previous referral to the Council on Legislation issued in June 2025, as well as the investigation "Enhanced Interest Deduction Rules for Companies" (SOU 2024:3) from June 2024. In contrast to the referral to the Council on Legislation and the investigation, the bill does not propose any changes to the general interest deduction limitation rules.

The targeted interest deduction limitation rules have been applied for nearly 15 years and have undergone several revisions, partly due to EU legal developments. This is one of the reasons the government now proposes changes to the current rules.

New rule for cross-border loans from companies within the EEA

A new provision is proposed to govern interest deductions for loans within a community of interest where the company entitled to the interest income is located in another EEA country than Sweden. Under this provision, interest deductions should generally be permitted. However, if a loan is part of a so-called artificial arrangement designed to provide the group with a significant tax advantage, the deduction may be denied in whole or in part.

The government believes this amendment ensures compliance with EU law. The bill states that provisions concerning cross-border debt relationships must be consistent with the freedom of establishment and should be limited to what is required under EU law and only target "purely artificial arrangements." The aim is to allow the denial of interest deductions in cases that, under EU law, are considered "purely artificial arrangements" and that lack economic substance and are structured to avoid tax. The definition of an artificial arrangement will be determined through legal interpretation and ultimately by the courts.

The government also proposes an update to the so-called “acquisition rule”, which targets interest on loans related to internal share acquisitions, to reflect the introduction of the new rule regarding loans from companies within the EEA. While the structure of the rule remains unchanged, it should now only apply to debts within a community of interest where the party entitled to the interest income is either a Swedish company or a company outside the EEA. This means that when such a debt concerns an internal acquisition of shares (equity rights), interest deductions will only be granted if the acquisition is significantly commercially justified. For cross-border loans from an affiliated company within the EEA, the intention is that the right to deduct interest will be assessed under the new provision. Deductions may be denied only if the loan is part of an artificial arrangement aimed at securing a significant tax advantage.

No changes of targeted interest deduction rules for loans from Sweden or non-EEA lenders

The government does not propose changes to the rules governing interest expenses where the party entitled to the interest income is located in Sweden, in a country outside the EEA with which Sweden has a tax treaty, or where the interest is taxed at a rate of at least ten percent. Interest deductions for such loans may still be denied if the loan has arisen solely or almost solely to provide the group with a significant tax advantage.

Limitation on deductions for negative net interest

The bill does not include changes to the so-called general interest deduction limitation rules, which the government has previously supported. Their exclusion from the bill means there will be no immediate changes to how the hedge room for interest deduction is calculated today. This means, among other things, that no consolidated calculation through a so-called calculation unit will be introduced, and the six-year time limit concerning the right to deduct negative net interest carried forward will not be removed. Furthermore, the safe harbor rule will not be raised from SEK 5 to 25 million.

The decision not to implement updates to the general interest deduction limitation rules by January 1, 2026, appears to reflect a budgetary priority. However, given the positive view expressed in the investigation and referral, these changes may be implemented in the future, potentially as early as January 1, 2027.

Changed definition of interest and infrastructure exemption

The bill does not propose updates to the definition of interest or the introduction of an infrastructure exemption.

The proposed amendment is a step towards aligning the Swedish rules with EU law. It is positive that a single rule will apply to all cases where the interest recipient is located in another EEA state. This contrasts with the investigation's proposal, which required assessing whether the borrower and lender could have exchanged group contributions if both were Swedish, to determine which rule should be used to assess the interest deduction when the interest recipient was in another EEA state. According to the current proposal, all loans where the interest recipient is in an EEA country other than Sweden will be assessed under a single rule.

However, the reform still results in two parallel targeted interest deduction limitation rules depending on the location of the interest recipient. If the interest recipient is in Sweden or a state outside the EU, the right to interest deduction will be assessed based on the same rules that apply today. If the interest recipient is in another EEA state than Sweden, the right to interest deduction will be assessed under the new proposed rule. 

The new introduces the concept of, "artificial arrangement." The precise scope of the proposed rule is unclear. According to the bill, the rule is intended to reflect the EU Court of Justice's practice on artificial arrangements and to align with established case law. For interpretation guidance, reference is made to the EU Court's decision in the so-called X BV case from October 4, 2024 (C-585/22), which assessed the Netherlands' interest deduction limitation rules. In that case, the Dutch tax authorities denied deductions for interest on a loan used to finance an external share acquisition. The acquiring company had borrowed from a low-tax group company in Belgium, which itself had been financed via a capital contribution. The EU Court held that Union law does not prevent national laws from denying interest deductions for loans that constitute purely artificial arrangements or are part of such arrangements. Based on the X BV case, the government states that an example of an artificial arrangement could be a situation where a capital contribution is made from Company A to Company C to finance a loan from Company C to Company B, even though Company A could have lent money directly to Company B without going through Company C. Such debt relationships are considered to have been created for tax reasons, provided that the interest income at Company C is taxed lower than it would have been at Company A.

For interest deductions to be denied, the arrangement must not only be artificial but also intended to provide the group with a significant tax advantage. It remains unclear what weight - if any - should be given to circumstances such as whether the borrower and lender could have exchanged group contributions in a hypothetical assessment if both companies were Swedish when evaluating whether interest deductions should be denied. Is such a hypothetical group contribution right relevant at all in assessing whether there is an artificial arrangement aimed at providing the group with a significant tax advantage?

The government further states that in assessing whether a debt relationship is artificial, consideration should be given to whether the debt relationship has been agreed upon with terms that deviate from what would have been agreed upon between independent parties, exemplifying terms such as interest rate, amortization, duration, and more. If, for instance, the loan carries a higher interest rate than what would have been agreed upon between independent parties, interest deductions should be partially denied, meaning to the extent the interest exceeds the market rate. This raises the question of how the new rules relates to for example the so-called correction rule in Chapter 14, Section 19 of the Income Tax Act (IL). Should one of the rules take precedence, and should the assessment differ depending on which rule is applied?

Ultimately, it will be up to legal interpretation to determine what constitutes an artificial arrangement aimed at providing the group with a significant tax advantage. For example, could it be concluded that debt relationships previously deemed acceptable by the Supreme Administrative Court under current regulations, i.e. not having arisen solely or almost solely to provide the group with a significant tax advantage, cannot now be considered artificial arrangements?

We continue to analyze the bill and are happy to discuss how the proposed rules may affect your group.

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