New ATAD aligned interest deduction restriction rules enacted by Sweden
On 14 June 2018, the Swedish Parliament enacted an interest deduction restriction proposal. The new rules will be applicable on financial years commencing after 31 December 2018.
Targeted rules for interest expense on intragroup loans
The current rules that limit the deduction of interest expenses on intragroup loans are modified. According to the amended rules, interest expenses on intragroup loans will be allowed where the beneficial owner of the interest is located within an EEA or treaty country, or if the interest is subject to tax of at least 10%. However, even if the said are fulfilled interest will not be deductible if the purpose of the intragroup loan is deemed to be exclusively or almost exclusively (90-95%) for the group to achieve a substantial tax benefit. The burden of proof is with the tax payer. As result, challenges to defend interest deductions on intra-group loans should be expected. In addition, when the loan has been obtained to finance an intragroup acquisition of shares the acquisition of the shares must substantially be motivated by sound business reasons to obtain interest deduction.
Rules that restrict deduction of interest expenses in certain hybrid situations are introduced. Deduction of interest on loans between affiliated companies will be disallowed when:
- The interest also may be deducted in another country, i.e. a double deduction;
- The interest is not subject to tax at the recipient,, i.e. a deduction without inclusion due to differences in the classification of the companies for tax purposes; and
- A deduction without inclusion results from a mismatch in classification of the payment or the underlying financial instrument.
General interest deduction limitation rule
Deduction of net interest expense will be limited to 30% of a company’s tax EBITDA. “Tax EBITDA” is defined as the taxable result before deduction limitation for net interest expense and net interest expense carried forward, plus interest expenses, tax depreciations (on certain assets) and allocation to the tax allocation reserve, less interest income, income from Swedish partnerships and foreign legal entities taxed at the level of the owners and reversal of the tax allocation reserve. If a company‘s taxable result is a loss for the taxable year before deduction of this year’s net interest expense and carried forward net interest expense, the tax EBITDA shall be increased with tax losses carried forward up to an amount that equals the year’s loss. The fact that part of tax losses carried forward will increase tax EBITDA will result in an increased possibility for companies with tax losses carried forward to deduct interest expense. For companies with tax losses that are subject to restrictions due to a change in ownership a rule is introduced meaning that, when the year’s taxable result is calculated in relation to the rules limiting the utilization of tax losses, the tax result should be calculated as if the net interest expense was deductible in full.
A de minimis rule is introduced, under which net interest expense up to SEK 5,000,000 can be deductible without having to satisfy the general interest deduction limitation rule. For companies that are part of a group, the deduction is limited to SEK 5,000,000 for the group as a whole.
Definition of interest
As part of the new rules, a definition of interest is introduced. The definition includes interest and other expenses incurred in connection with raising of finance and payments economically equivalent to interest. The introduction of an interest definition means that the scope of what is deemed interest is broadened. If a company has a loan in foreign currency where the currency exposure has been hedged through a derivative the general interest limitation rule will be applied on the foreign exchange effect. This regardless of whether the debt and derivative are held by two different entities within the same group. For financial leases, a part of the payment should be considered to be interest.
According to the new rules it will no longer be possible to capitalize interest expense as part of the acquisition cost for certain assets such as inventories, machinery and equipment, buildings, land improvements and self-generated intangible assets. It is however stated in the statutory works that this does not apply to interest expense included as part of the acquisition costs before the new rules enter into force. Companies that despite these rules capitalize interest expense as part of the acquisition cost will need to identify the interest expense as part of the acquisition cost to include it when calculating the deductible interest expense.
Group consolidation and carry forward
Companies with net interest income will be allowed to deduct other group companies’ net interest expense. The deduction is limited to the net interest income of the company, and allowed only where both companies are able to exchange tax-deductible group contributions. Group contributions is another way of increasing companies tax EBITDA, since paid and received group contributions shall be included when calculating tax EBITDA.
The fact that tax EBITDA will be increased with tax losses carried forward means that companies making a loss still have some possibility to deduct net interest expense. It will however mean that using group contributions to increase tax EBITDA will be complex, as the tax losses carried forward must be considered.
A company that is not able to fully deduct its net interest expense will be allowed to carry forward the excess for up to six years. However, the right to use the net interest expense carried forward is restricted following a change of control.
Increased depreciations on apartment houses
For the construction of apartment houses not to be adversely affected by the new interest deduction limitation rules, an increased depreciation for apartment houses is introduced, meaning that an additional depreciation of two per cent per year is allowed during the first six years from the completion of the apartment house.
Reduction of the corporate tax rate
The corporate tax rate is reduced in two steps, for fiscal years beginning after 31 December 2018 to 21.4% and for fiscal years beginning after 31 December 2020 to 20.6%. If a company has a split fiscal year the new lower rate will apply when the new fiscal year commences in 2019 and 2021 respectively.
Taxation of tax allocation reserve and contingency reserve
The taxation of the tax allocation reserve is increased. According to current rules a notional income is included in the taxable result each year corresponding to 72% of the government loan rate at the end of November the year before multiplied by the tax allocation reserve at the beginning of the fiscal year. According to the amended rules the notional income will correspond to 100% of the government loan rate multiplied by the tax allocation reserve at the beginning of the fiscal year. A floor for the government loan rate has previously been introduced, which means that when applying this rule the government loan rate will never be considered to be less than 0.5%.
A taxation of the contingency reserve is introduced, meaning it will be taxed in the same way as the tax allocation reserve. Hence, a notional income corresponding to the government loan rate at the end of November month the year before multiplied by the contingency reserve at the beginning of the year will be included in the taxable result.
A temporary taxation of the contingency reserve is also introduced, meaning that insurance companies with a contingency reserve after December 31, 2020 shall include a notional income calculated at 6%of the reserve. The notional income can either be included by one sixth of the financial year and by one sixth per annum for the following five financial years or by the full amount during the first financial year.
A change in the corporate tax rate affects how the deferred tax is to be calculated. This shall be done in accordance with the new tax rates, depending on when the deferred taxes are expected to be realized. Deferred tax shall be accounted for as income or expense and included in the profit of the period, except for taxes relating to transaction of events reported in the same or other period outside of profit or loss.
In view of this, companies need to review their deferred tax assets and deferred tax liabilities before the quarterly and full year accounts and assess when they will be realized. For deferred tax assets and deferred tax liabilities that are estimated to be realized by 2018, the tax rate of 22% will be applied, for realization per 2019-2020, the tax rate of 21.4% will be applied and for realization by 2021 onwards, the tax rate of 20.6% shall apply.
The changes in deferred tax assets and deferred tax liabilities resulting from this review shall be reported in the profit for the period except to the extent that they are attributable to items previously reported in other comprehensive income or in equity, then the changes shall be reported in other comprehensive income or directly in equity.
Provisions for tax allocation reserve prior to January 1, 2019 are subject to transitional provisions, which means that reversal of such provision will be subject to effective taxation of 22%. Thus, tax liabilities attributable to such provisions should not be converted into the new tax rates.
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