Corporate tax cuts and interest deduction limits in Sweden

09 April 2018

Carl Magnus Uggla

The introduction of EBITDA-rules

Under the proposed EBITDA-rules, the deductibility of net interest expense would be limited to 30% of EBITDA. The proposal is based on OECD:s BEPS-project and the EU so-called Anti-Tax Avoidance Directive (ATAD).

The proposal also includes a "safe harbor"-rule. No limitation would be imposed on a group with a net interest expense below SEK 5 million (approx. EUR 485 thousand). The proposal provides also for the possibility offset net interest income and expense among companies that can exchange group contributions with fiscal effect.

Non-deductible net interest expense could, under the proposal, be carried forward for six years, although change of control would as a main rule extinguish the carryforward, unless the change of ownership occurs between companies in the same group.

Finaly, as regards to the EBITDA-proposal, it is proposed that inclusion of interest expense in the acquisition value of certain assets including e.g., inventory, buildings, machinery and equipment as well as intangible assets, will not be permitted.

Existing interest deduction limitation rules
The existing interest deduction limitation rules will be simplified but continue to exist alongside the EBITDA-rule. Interest on intercompany loans will thus only be tax deductible provided the interest would have been subject to at least 10% tax with the beneficial owner of the interest income. The beneficial owner of the interest must reside in EU/EES, or in a state with which Sweden has entered into a tax treaty with, and even if the taxation is 10% or more, the interest expense will still not be tax deductible if the loan has been put in place exclusively, or virtually exclusively, to provide the group with a significant tax benefit.

Introduction of tax rules regarding financial leasing
Under the proposed rules applicable to financial leasing, the leasing fee should be re-characterized into an interest component and an amortization of debt component and subject to the above described rules on interest deductions. A lessee would not have to recognize an interest component if the yearly leasing-fees are below SEK1 million (approx. EUR 97 thousand).

Reduced corporate income tax rate and expansion fund tax rate
The present corporate income tax rate of 22% would be reduced to 21.4% in 2019 and then further reduced to 20.6% in 2021.

Hybrid mismatches
A hybrid mismatche-rule is also proposed based on BEPS/ATAD. It will only apply affiliated companies.

A primary deduction on dwellings
The proposal provides for an extra depreciation of 2% per annum for construction, as well as for reconstructions of and additions, to existing dwelling buildings during a period of six years from the completion. In affect doubling the depreciation rate the first six years.

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