Improved interest deduction rules for companies?

An increased maximum deduction allowed under the safe-harbour rule and a new joint calculation of interest deduction for group companies under the Swedish interest deduction limitation rules – but still complex rules regarding intra-group interest expenses. Further, a ban on interest deduction for loans financing internal share acquisitions is proposed.  
 

In 2019, Sweden introduced rules on companies' right to deduct interest expenses, the so-called interest deduction limitation rules. In 2021, the Swedish government decided to appoint a government committee to review certain issues with the interest deduction limitation rules. After more than two years of work, a final report has been presented which contains several proposals for changes. Below are some of the most important proposals and our comments.

• A new system for a joint group calculation of a net interest and deduction basis (tax EBITDA) is introduced. Companies with the possibility to equalise profits under the rules of group contributions will form a calculation unit that calculates a joint net interest and a joint deduction basis.
• The calculation of the net interest is proposed to be performed in the same way as today, with the difference that negative net interest from previous years will affect the current financial year’s net interest.
• A proposed abolition of the time limit of six years for the right to carry forward and deduct any remaining negative net interest. Further, it proposed that any remaining net interest should be determined at its amount in connection with the decision on final tax.
• The amount limit in the safe-harbour rule is proposed to be raised from SEK 5 million to SEK 25 million. Positive net interest can be offset against negative net interest within the calculation unit, and any excess negative net interest may then be deducted up to SEK 25 million within the community of interest. When the safe-harbour rule is applied, any remaining net interest cannot be carried forward to the next year. However, remaining negative net interest from previous years should be possible to deduct under the safe-harbour rule.
• Unlike today, it is proposed that all companies within a community of interest must apply the same rule, i.e., either the EBITDA-based rule or the safe-harbour rule. The EBITDA-based rule is proposed to take precedence if companies within the community of interest have chosen different rules.

• A new provision is proposed to be introduced where certain intra group debts are exempted from the deduction limitation in Section 24, Chapter 18, paragraph 2 of the Income Tax Act. According to the new provision, the deduction limitation shall not apply if the borrower and the lender (i.e., the one who actually has the right to the income) have the possibility to equalise profits under the rules of group contributions, or if the lender is located within the EEA, would have had this possibility if the lender had been Swedish. If the borrower and the lender are sister companies, the exceptions to the deduction limitation only apply if the parent company is located in the EEA. The deduction limitation will still apply if the recipient's interest income would have resulted in a surplus for the lender due to a group contribution restriction if the income had been a group contribution. Where the lender is a foreign company within the EEA, a notional test will be applied to determine whether a group contribution restriction would have existed between the borrower and the lender had the lender been Swedish.
  
• A special rule is proposed to be introduced that would entail that deductions can be refused when the Swedish Tax Agency can demonstrate that the debt relationship is part of a wholly artificial arrangement and has arisen exclusively or almost exclusively to gain a substantial tax benefit for the community of interest. This rule is intended to provide the possibility of denying interest deductions on loans that would be subject to the anti-abuse principle under EU law.
• Furthermore, a complete deduction prohibition for interest expenses regarding an intra-group debt is proposed, if the debt relates to an internal acquisition of shares. The deduction prohibition is also proposed to apply to debts that have replaced a temporary external debt and debts that arise after the acquisition of shares but are directly related to the share acquisition. Only two exceptions are proposed that would allow for interest deductions when the debt relates to an internal acquisition of shares: 1) if the internal acquisition is directly related to and caused by an external acquisition or 2) if the debt has incurred as part of an intra-group restructuring in preparation for external share sale, and there is a need for temporary financing.

• Regarding the interest definition, the inquiry does not propose any significant changes.
• However, the inquiry does propose that a special rule for companies that acquire portfolios of expired or otherwise credit-impaired receivables at a discount. The proposed rule would mean that the income from such assets, which has been calculated according to the effective interest method and have been reported in accordance with Swedish GAAP, should be treated as interest income for tax purposes. This proposal deviates from established Swedish case law, according to which interest calculated according to the effective interest method should not be deemed as interest for tax purposes.

• No changes have been proposed regarding the rules on hedging foreign currency, except for a clarification regarding the valuation of inventory of financial instruments. A second paragraph is proposed to be added to Section 17, Chapter 20 of the Income Tax Act, which would clarify that an inventory of financial instruments may be recorded at the total acquisition cost, even though certain items in the inventory may be recorded at the balance sheet date exchange rate according to other provisions.

The proposal represents a completely new system for calculating the maximum possible interest deduction allowed within a group and would bring the Swedish rules closer to what applies in several other countries. Unlike today, neither group contributions nor tax losses carried forward will affect the deduction basis, which is positive. The joint calculation will generally be more advantageous for groups compared to what applies today. 

A central coordination of a groups´ interest deductions will be necessary, both for the companies included in a calculation unit, as a joint calculation must be made, and for all companies in the community of interest, as all companies within the community of interest must apply the same rule (the EBITDA-based rule or the safe-harbour rule). It will be important to assess each year how the interest deductions should be allocated. Another complicated part is how a potential reassessment of previous year’s calculations will affect the companies' total deduction basis or net interest and how the change should be treated between the companies. In connection with both acquisitions and divestments of group companies, this will entail new requirements for regulation in share transfer agreements, etc.

Due to the changed view of remaining negative net interest, it may already be possible in 2026 to deduct the remaining net interest from previous years within the framework of the increased limit under the safe-harbour rule. If the committee’s proposal becomes reality, there may therefore be reason to apply the EBITDA-based rule in the years before the new rules enter into force, even though the safe-harbour rule would provide a greater deduction of negative net interest during the year’s preceding the implementation of the rules.  

It is also conceivable that the abolished time limit for remaining negative net interest may provide an opportunity to recognize a deferred tax asset on remaining negative net interest.

The proposal for the new targeted deduction limitation rule, Section 24, Chapter 18a of the Income Tax Act, means that the targeted deduction limitation rules remain complexly designed with several selective assessment parameters. The practical meaning of the terms "wholly artificial arrangements" and "exclusively or almost exclusively to obtain a significant tax advantage" is unclear and will need to be crystallized in future case law. This creates further legal uncertainty.

We note that the committee’s proposal seems to have assumed that only the freedom of establishment is applicable in the assessment of whether the targeted deduction limitation rules are in breach of EU law. The question is whether the right to free movement of capital could also be invoked. In that case, the new proposed Section 18a would also need to be applied to loans from companies outside the EEA to be compatible with EU law.

If the committee’s proposal of non-deductibility of interest on internal loans financing internal acquisition of shares becomes reality, it will make commercial intra group restructurings more difficult and give companies less flexibility.

The proposal is likely to be submitted for consultation in the near future, and work on the proposal will continue in the Ministry. It is not only branch organizations that have the opportunity to comment on the proposal, but also individual companies. We would be happy to go through the proposal with you to see how it may affect your group!

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Maria Andersson Berg
Skatterådgivare
KPMG i Sverige
+46 73 145 58 48
maria.andersson.berg@kpmg.se