Deloitte's summary and reflections on the proposal for the supplementary provisions in the Swedish Top-up Tax act 

Introduction 
On 15 October 2024, the Swedish Government released the bill regarding the supplements to the Swedish Top-up Tax Act that were announced earlier this year. The additions that are now proposed to the existing legislation are due partly to the need to adapt the legislation to the administrative guidance from the OECD that was not in place when the legislation was originally introduced, and partly due to the need to adjust certain rules to meet the requirements of the OECD guidance. The bill proposes that the proposed rules shall enter into force on 1 January 2025, with extensive possibility of voluntary retroactive application from 1 January 2024. 

The bill is largely in line with the Ministry of Finance's report and the referral to the Council on Legislation submitted earlier this year, although there have been some editorial changes and clarifications in the law and some statements in the comments have been changed. We have summarised some important observations from the bill below, with a focus on news and deviations from the report and the referral to the Council on Legislation. 

Brief information on the Top-up Tax Act and the supplementary provisions
The Top-up tax act represents the Swedish implementation of the Pillar II regulations and entered into force on 1 January 2024. Somewhat simplified, the rules mean that groups with an annual turnover of EUR 750 million or more are subject to a minimum taxation of 15% per jurisdiction through the application of a so-called top-up tax up to the minimum tax rate. During the first three years, there is an opportunity to apply temporary simplification rules (hereinafter referred to as CbCR Safe Harbour rules) based on the Group's qualified CbC report, provided that certain conditions are met. For those jurisdictions that do not meet the requirements of the CBCR Safe Harbour rules, so-called full GloBE calculations must be made. 

If a top-up tax is to be levied, it is collected primarily in the low-taxed country under the national top-up tax rule (QDMTT), secondarily in the parent company's country under the main rule of top-up tax (IIR) and as a final back stop rule in another country according to the so-called supplementary rule for top-up tax (UTPR). 

The incompleteness of the implementation and additional administrative guidance from the OECD have led the Government to present a comprehensive supplementary proposal to the top-up tax act. The purpose of the supplement is to introduce rules that have previously been missing, to provide further guidance on how the rules should be interpreted and to ensure that the Swedish implementation of the QDMTT provisions is acceptable from an OECD perspective. 

The proposed rules entail, among other things, that the OECD's administrative guidance from 1 February 2023, 12 July 2023 and 15 December 2023 will now be implemented in Swedish legislation. However, the administrative guidance from 24 May 2024, which includes important guidelines on the allocation of tax to permanent establishments, practicalities around the so-called recapture rule and the treatment of deferred tax in situations where the reported values differ from the values that need to be used in the Pillar II calculations, are not yet addressed.

The requirement for qualified CbC report in the CbCR Safe Harbour rules
In order to apply the temporary Safe Harbour rules based on the CbC report, the data used for the calculations under the rule must be based on a qualified financial report. Rules are introduced to further clarify what constitutes a qualified financial statement.

In order to apply the rules, a group must, as already earlier governed by the rules, use a CbC report that is either based on the parent company's consolidated financial statements or each individual company's annual report. 

It is now clarified, among other things, that data for a constituent entity, as well as constituent entities in the same jurisdiction, may not, generally, be obtained from different sources. However, it is permitted to use different sources for different jurisdictions, as long as the same source is used for the constituent entities in the relevant jurisdiction.

The Government also clarifies the treatment of purchase accounting related goodwill or similar items in cases where such items are included in the CbC report. According to the proposed rules, such data may only be used if corresponding items were included in a CbC report for a financial year that began after 31 December 2022 or if the adjustments have been required by law or other regulations. This is provided that depreciation and amortisation of acquisition-related goodwill relating to transactions carried out after 30 November 2021 are eliminated from profit before tax. Exceptions apply if there is a deferred tax attached to the goodwill item.  

The treatment of hybrid arbitrage arrangements in the CbCR Safe Harbour rules
Provisions are introduced to ensure that the effects of so-called " hybrid arbitrage arrangements" may not affect the outcome according to the CbCR Safe Harbour rules. The provision is aimed at arrangements between group entities that have been entered, transferred, or amended after 15 December 2022 and that entail deductions for expenses without the corresponding income being taxed or a loss or tax expense being considered several times.

The rules on arrangements that give rise to the deduction of expenses without the corresponding income being taxed apply not only to traditional hybrid situations, but also to situations where the income in question is set off against a deferred tax asset that is of no value and has been written down or would have been written down if the arrangement had not been put in place.  In the original proposal, this was not explicitly stated in the actual law, which is a difference from the bill, in which the Government is now proposing this to be expressed in law. Similar to what was the case in the original proposal, the bill also clarifies that ordinary business transactions (e.g., commercial loans) are not intended to be affected by the regulation. 

Jurisdictions where hybrid arbitrage arrangements exist may continue to apply the CbCR Safe Harbour rules. However, the CBCR must be adjusted to exclude costs related to the hybrid arbitrage arrangement. 

Changes to the Swedish QDMTT rule 
The existing Swedish QDMTT rules state that it is up to the taxpayer to choose whether the national accounting standard (e.g., K2 or K3) or the standard used in the consolidated financial statements (e.g., IFRS) should be applied in the QDMTT calculation. 

In order for the Swedish QDMTT rules to comply with the OECD guidelines, the rules are now being updated so that the national accounting standard (e.g., K2 or K3) must be applied provided that all companies apply the same accounting standard and that all companies are subject to an audit obligation or that there is an obligation to prepare accounts. In the bill, an additional condition is added; that the companies have the same financial year as the one that applies in the consolidated financial statements. If the companies in a group do not meet the above criteria, the accounting standard used in the consolidated financial statements (e.g. IFRS) must instead be applied in the QDMTT calculation. 

According to the existing rules, CFC taxes, withholding tax on dividends and tax levied in the country of the head office linked to permanent establishments, may be allocated from one company's GloBE calculation to another company's calculation. 

The Swedish QDMTT rule is now being updated so that CFC tax, withholding tax and tax imposed in the country of the head office, which would normally have been distributed to Swedish group companies, will no longer be distributed to the Swedish group companies. Since such foreign tax is disregarded for the purpose of the QDMTT calculation, the Swedish QDMTT rule is given precedence over such foreign tax. 

The proposed changes do not affect how the IIR calculation is to be made. According to this rule, the ordinary rules on the allocation of foreign tax still apply. 

Additional Safe Harbour rules
In addition to the CbCR Safe Harbour rules, the following Safe Harbour rules are proposed:

• Permanent QDMTT Safe Harbour: In the way that the GloBE rules are currently implemented, a Swedish parent company will apply the IIR rule to its foreign subsidiaries, even though the subsidiary is subject to a foreign QDMTT rule. This means that top-up tax can be levied twice, with a subsequent credit possibility to eliminate any double taxation. A permanent Safe Harbour rule is now introduced where subsidiaries that are subject to a local QDMTT rule are exempted from the Swedish IIR rule. This provided that the foreign QDMTT rule is considered qualified by the Inclusive Framework of the OECD (IF).
• Temporary Safe Harbour regarding the UTPR rule: The UTPR rule mainly applies from 1 January 2025. A temporary Safe Harbour in relation to the rule is now proposed until the financial year 2026. According to the Safe Harbour rule, the top-up tax for the jurisdiction in which the parent company is located is considered zero, provided that the jurisdiction has a corporate tax rate of at least 20%. The Safe Harbour rule is important for groups with parent companies in the United States.
• Permanent Safe Harbour for non-material constituent entities: A permanent Safe Harbour is introduced in the GloBE rules for constituent entities that are exempted from the consolidated financial statements due to the fact that the entities are of no material importance to the financial statements. Instead of complete GloBE calculations being prepared based on the accounts, a simplified calculation based on the CbC report may be made for these entities. In order to apply the Safe Harbour rule, it is required, among other things, that the consolidated financial statements are subject to external audit and that the accounts of the entity based on which the CbC report is prepared, in cases where the entity has revenue exceeding EUR 50 million, are prepared in accordance with a so-called acceptable or authorized accounting standard. 

Group contributions
The bill does not contain explicit provisions on the treatment of group contributions. However, the bill makes important statements in relation to the treatment of group contributions in the calculation of the GloBE income and Covered tax expense. 

Initially, the Government states that group contributions can be reported in different ways for accounting purposes, but that the effects of the group contributions in the GloBE calculations should not have any impact on the aggregate GloBE income of the Swedish companies. 

According to the Government's assessment, in cases where group contributions are not already recorded in accordance with their economic meaning but are e.g., recorded as appropriations in the financial statements, they should nevertheless be treated as dividends or capital contributions in accordance with the economic meaning. 

In our view, this means that group contributions typically, and in the absence of other guidance from the Swedish Tax Agency, may need to be exempted from the recipient company's GloBE income calculation and added back in the paying company's GloBE income calculation. The corresponding tax expense shall be reallocated from the Covered tax expense of the receiving company to the Covered tax expense of the paying company.

It is worth noting that the original referral provided more clear guidance on how the tax cost should be reallocated from the recipient to the paying company in the Covered tax expense calculation. The bill lacks the same guidance, although the assumption still appears to be that group contributions and the associated tax costs are to be treated based on the principles mentioned above.  

Other additions
In addition to the above changes, the following changes are proposed to the legislation:

• Currency rules, e.g. on what applies when the consolidated financial statements are not prepared in euros
• Rules on when the parent company and a constituent entity have different financial years
• Elections that allow for more flexibility in the treatment of excluded dividends, and excluded equity gains or losses
• Rules that provide for the application of the CbCR Safe Harbour rules also to groups that are not subject to CbC reporting, e.g. for national groups.
• Additional rules in relation to the treatment of tax credits
• Rules regarding specific adjustments required in situations with a negative adjusted GloBE income or a positive GloBE income in combination with a negative Covered tax. 
• Rules on the treatment of hedges of investment in foreign operations
• Simplifications in the transitional rules regarding the transfer of assets that took place after 30 November 2021
• Rules on the calculation of the substance-based carve out in relation to cross-border employees and mobile assets
• Rules regarding the application of the QDMTT for any stateless permanent establishments
• Rules on foreign tax credits in relation to a foreign QDMTT, e.g. against tax on Swedish CFC income
• Rules on the treatment of debt forgiveness
• Additional rules for insurance companies

Deloitte's comments
The bill that has now been submitted presents no major surprises, although some important clarifications/changes are now being made, for example, to the rules on hybrid arbitrage arrangements and the treatment of group contributions. As for the group contributions, it remains to be seen what guidance, if any, will be provided by the Tax Agency regarding the practical treatment. 

Broadly speaking, the bill contains good supplements to the Top-up Tax Act, which both ensures that Sweden implements a larger part of the guidance provided by the OECD and which contributes with further guidance in interpreting the Swedish rules, in particular the QDMTT rule. 

The change to which standard is to be used in the application of the QDMTT rule will probably not have a large impact on many groups in relation to the accounting standard that needs to be applied in the Swedish companies' calculations. This considering the strict requirement that all companies must use the same accounting standard. For example, no exception is made here for situations where a parent company, for example, applies RFR2 (because it is listed on the stock exchange) and the remaining companies apply K3. For those groups that do not meet this strict requirement, the calculations will still need to be prepared on the basis of the consolidated financial statements (e.g., according to IFRS). 

At the same time, the change is an important part of the Swedish government's ambition to ensure that the Swedish QDMTT rule is qualified. This is important to avoid giving other countries an opportunity to apply their own legislation to Swedish constituent entities in parallel with the Swedish QDMTT rule. It is the IF (the inclusive framework of the OECD) that will finally determine whether a QDMTT rule is qualified, which is a work that remains.  

At the same time as the legislation is being supplemented in important aspects, the additional provisions to the Top-up Tax Act contribute to an already complex framework becoming even more complex. Further legislative measures therefore likely to need to be taken, for example to simplify the rules and to correct parts of the legislation that have not been sufficiently processed. In addition, the legislation will likely need to be updated further to consider the potentially never-ending administrative guidance from the OECD. As mentioned at the beginning, for example, the draft law does not yet include the administrative guidelines of 24 May 2024. 

It also remains to be seen where the discussions about further permanent Safe Harbour rules will end. So far, only very limited information is available, except that discussions are still ongoing and that these discussions to some extents are still based on the CbCR Safe Harbour rules. 

We at Deloitte are constantly monitoring the development in relation to Pillar II and are of course available to discuss the bill and other aspects related to Pillar II. 

Authors: My Öhman, Charlotte Danfors, Michael Lindgren, Matteus Benjaro

Contact us

My Öhman
Consultant
myohman@deloitte.se
+46 70 080 38 38

Charlotte Danfors
Consultant
cdanfors@deloitte.se
+46 70 080 43 14

Michael Lindgren
Director
mlindgren@deloitte.se
+46 70 080 33 40

Matteus Benjaro
Director
mbenjaro@deloitte.se
+46 70 080 24 06