Government memorandum proposing corporate tax cuts and new interest deduction limitation rules
Swedish Government proposes new corporate tax rules
A Government memorandum proposing corporate tax cuts and new interest deduction limitation rules has been released today.
The proposals are summarized in the following:
Interest deduction limitation rules
- A general limitation of interest deductions in the corporate sector is primarily introduced as an EBIT rule (where the cap for deduction is calculated as 35 percent of earnings before interest and tax, EBIT) and, secondarily, as an EBITDA rule (where the cap for deduction is calculated as 25 percent of earnings before interest, tax, depriciation and amortization, EBITDA),
- Equalization of interest deduction capacity within a group is possible, between companies which are able to exchange group contributions,
- Unutilized interest deduction capacity can be utilized the following year but is lost in the event of a change in ownership,
- Interest of up to SEK 100,000 per group may be deducted without limitation,
- The existing interest deduction limitation rules for certain intra-group loans are proposed to remain in place but are amended. The definition of “group” is extended to include further ownership constellations. Furthermore, the current ten percent rule and the so-called business purpose test are removed and replaced by a rule providing that interest is not deductible where the debt relationship has been entered into “exclusively or as good as exclusively” for the group to obtain a significant tax benefit. For deduction it is also required that the lender (i) is resident within the EEA, (ii) in countries with which Sweden has double tax agreements or (iii) subject to tax of at least 10 percent.
- An interest deduction prohibition is proposed in respect of certain cross-border situations (hybrid rules). The prohibition applies when a company in another state obtains a tax deduction for the same interest expense or when the corresponding interest income is not subject to tax due to the classification of the income for tax purposes.
- The corporate tax rate is reduced from 22 percent to 20 percent,
- Tax rules on financial leases are introduced.
- The rules for impairment deductions for rental housing are changed in such a way that, in addition to the normal deduction for depreciation, 10 percent of the expenses may be deducted within a five-year period from completion of the rental housing.
- An increase in the flat rate income on allocation reserve (Sw: periodiseringsfond) is proposed,
- Reversal of allocation reserve will be at 110 percent when the reserve is reversed to taxation at the proposed lower corporate tax rate.
- A limitation in the use of brought forward losses is introduced during a two, or alternatively three, year period. The limitation would essentially mean that only 50 percent of trading profits can be reduced by brought forward losses, with the remainder of brought forward losses being carried forward.
- A temporary flat income on security reserve is introduced (10 percent), as well as a permanent annual standard income (government bond rate).
The proposals are proposed to enter into force on 1 July 2018. The memorandum will now be subject to consultation, with input required by September 26, 2017.
The Swedish rules for interest deductions in the corporate sector have been the subject of discussions and various changes for many years. The Ministry of Finance has now presented its proposal on how Sweden will adapt its legislation regarding, inter alia, interest deductions in line with the EU Anti Tax Avoidance Directive of July 12, 2016. It is noted that the government primarily advocates an EBIT rule, despite of the fact that EBITDA is generally internationally applied and also endorsed by the OECD and the EU. The Government also advocates that the current interest deduction limitation rules remain, albeit with a somewhat more limited scope, despite the massive criticism, e.g. in respect of legal certainty and difficulties in application. It remains to be seen how this will be received in the consultation. Furthermore, the Ministry of Finance proposes restrictions on the use of brought forward losses and wants to introduce a flat-rate income on security reserves, which are also proposals that many will have comments on.
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