Sweden: Interest deduction limitation rules found in breach of EU law (CJEU judgment)

Sweden: Interest deduction limitation rules

The Court of Justice of the European Union (CJEU) today issued a judgment concluding that the “10% rule” in the Swedish interest deduction limitation rules (applicable from 2013-2018) is contrary to the EU freedom of establishment.


The case is: Lexel AB v. Skatteverket (C-484/19, 20 January 2021). 

KPMG observation

The judgment is expected to affect taxpayer companies that have been denied interest deductions and may provide opportunities to claim an interest deduction.


The case concerns a Swedish company that has been denied a deduction, by reference to the exception to the 10% rule, for interest expenses paid to a French group company with a tax loss generated from French operations.

The exception to the 10% rule provided that interest expenses relating to intra-group debt may not be deducted if the “main reason” (>75%) for the debt relationship was to create a significant tax benefit for the group. The question presented was whether this rule is in breach of the freedom of establishment.

Judgment of the CJEU

The CJEU initially noted that if the lender had been a tax resident of Sweden, the Swedish company would have been allowed to deduct the interest expenses, taking into account that the companies would then have been covered by the Swedish group contribution rules. The CJEU concluded that:

  • The Swedish rules reflected different treatment that had a negative impact on a company’s ability to exercise the freedom of establishment. 
  • This difference in treatment could not be justified by reference to the need to prevent tax avoidance or abuse, or to the need to balance the allocation of taxing rights between EU Member States.
  • A combination of these two grounds of justification could not be accepted.

The CJEU placed particular emphasis on the fact that the exception to the 10% rule may cover transactions carried out on market terms and that consequently do not constitute wholly artificial or fictitious arrangements. 

The CJEU concluded that the Swedish rules are contrary to the freedom of establishment.

What’s next?

The case will now referred back to the Swedish Supreme Administrative Court for a final decision. The CJEU judgment could provide grounds for companies to assert they are entitled to interest deductions.

KPMG observation

The CJEU conclusion that the exception to the 10% rule is in breach of EU law clarifies what had been an uncertain issue. A number of taxpayers have had their deduction for interest expenses denied and the exception to the 10% rule had been applied broadly by the lower and appeals courts which almost all (with a few exceptions) held in favor of the Swedish tax agency. In fact, the Swedish Supreme Administrative Court had previously held that the prior rules from 2009 were not in conflict with EU law.

The judgment by the CJEU concerns only the exception to the 10% rule. It may be that the right to deduct interest with the support of the so-called “business purpose test” could also be affected by the judgment—especially given that the analysis of the CJEU with regard to justification goes beyond what has previously been stated by the European Commission and Swedish courts (for example, the EC considered that the rules could be justified but that the rules were not proportionate). 

There could be contentions (based on an interpretation of the CJEU judgment) that the new rules (effective 1 January 2019 and replacing the 2013-2018 rules) are also partially contrary to the freedom of establishment. 

Note that the issue in this case has only been tested against the freedom of establishment. Thus, the judgment is not immediately applicable if the recipient of the interest is a resident outside the EU/EEA (although there may be potential assertions that, under different circumstances, the judgment could also apply regarding the free movement of capital).

Read a January 2021 report prepared by the KPMG member firm in Sweden

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