Swedish Government proposes new interest deduction limitation rules and corporate tax cuts
Sweden: Proposal on new corporate taxation rules
The Swedish Government has now presented its proposal on new tax legislation re interest deduction in the corporate sector.
The Swedish Government has now presented its proposal on new tax legislation re interest deduction in the corporate sector. The proposal follows by the EU Anti-Tax Avoidance Directive. The Government also proposes a reduction of the corporate tax rate.
In general, the proposal could be summarized with the following points:
Interest deduction limitation rules
- A general EBITDA based interest deduction limitation is introduced in the corporate sector, where the cap is calculated as 30 per cent of earnings before interest, tax, depreciation and amortization (EBITDA). The limitation applies to negative net interest expenses as defined under Swedish tax law, i.e. the difference between interest income and interest expenses.
- Equalization of interest deduction capacity within a group is possible, provided the companies qualify for Swedish tax consolidation.
- Negative net interest not possible to deduct in one year may be carried forward for up to six years, but is lost in the event of a change of ownership.
- Net interest expenses of up to SEK 5,000,000 per group may be deducted without applying the EBITDA rule.
- The current interest deduction limitation rules for certain intra-group loans are amended. According to the proposal, interest deduction on such debt should be granted if the beneficial owner of the interest income within the group (i) is resident within the EEA, (ii) is resident of a state with which Sweden has a tax treaty not limited to certain income or (iii) is subject to a corporate tax of at least 10 per cent. However, no tax deduction should in any case be granted if the underlying purpose with the loan exclusively or as good as exclusively (90-95 per cent or more) is to obtain a substantial tax benefit for the group.
- An interest deduction prohibition is proposed in respect of related party debt in certain cross-border situations (anti-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 in two steps: from the present 22 per cent to 21.4 per cent for financial years commencing after December 31, 2018, and to 20.6 per cent for financial years commencing after December 31, 2020.
- The previously proposed new limitation of utilization of tax losses carry forward is abandoned.
- It is not allowed for tax purposes to capitalize interest expenses on the acquisition costs for machinery & equipment, building or land improvements.
- Tax rules on financial leases are introduced. The new tax rules on financial leases regards only the interest element in certain leases and not who is entitled to tax depreciations. Basically, the new provisions mean that an interest element should be determined in certain leases and be included in the EBITDA calculation.
- The rules for impairment deductions for rental housing are changed in such a way that, in addition to the normal deduction for depreciation, 12 per cent of the expenses relating to construction, extension or renovation may be deducted within a six-year period from the completion of the rental housing.
- The flat rate deemed taxable income on tax allocation reserve (Sw. periodiseringsfond) is increased.
- Reversal of allocation reserve at the proposed lower tax rate will be adjusted, to balance the lower corporate tax rate.
- A temporary flat income on security reserves is introduced (6 per cent), as well as a permanent annual standard income (government bond rate).
The new rules are proposed to enter into force on January 1, 2019, applying to financial years commencing after December 31, 2018.
When presenting the proposal, the Minister of Finance stated that the Ministry of Finance will monitor the proposed adjustments and, if necessary, return with new revised rules. This includes, inter alia, how the amended current interest deduction limitation rules work, the time-limit to utilize net interest expenses carry forward and potentially a particular exemption to public infrastructure projects. The Government has previously stated that the Government bill should be presented on April 16. It is yet uncertain whether this deadline will be met.
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The Swedish Parliament passed 14 June a bill with the enactment into Swedish law of the EU Anti-Tax Avoidance Directive. The new rules include new interest deductions rules that will have substantial impact for a large number of companies in Sweden. Moreover, the corporate tax rate will be lowered in two steps. The new rules enter into force on January 1, 2019.