Sweden: Current rules limiting deductions for intra-group interest payments held contrary to EU law (court judgment)

A case concerning the currently applicable 2019 interest deduction rules that limit certain deductions for intra-group interest payments.

Rules limiting deductions for intra-group interest payments held contrary to EU law

The Supreme Administrative Court (Högsta förvaltningsdomstolen) on 13 December 2021 issued a judgment in a case concerning the currently applicable 2019 interest deduction rules that limit certain deductions for intra-group interest payments.

The court concluded that the rules in question were contrary to the freedom of establishment pursuant to the provisions of the EU Treaty and that the interest was deductible. 

Summary

The case involves a Swedish limited liability company that had applied for an advance ruling regarding its right to deduct interest payments on a loan from an Irish company within the same group.

In general, under the interest deduction limitation rules (effective 1 January 2019), deductions are allowed for intra-group interest payments if, for example, the entity receiving the interest payment is a resident of a country within the European Economic Area (EEA). However, under a special exception, interest deductions can be denied when the debt relationship has been established "exclusively or almost exclusively" to obtain a significant tax benefit (the "exception rule").

Under prior interest deduction rules (effective 2013-2018), the standard limiting a deduction was that the tax benefit was the “main reason” for the debt relationship.

The Supreme Administrative Court tested the compatibility of the current Swedish interest deduction rules against EU law and in light of a judgment of the Court of Justice of the European Union (CJEU) in the Lexel case (C-484/19, 20 January 2021) (concluding that the “10% rule” in the Swedish interest deduction limitation rules applicable from 2013-2018 was contrary to the EU freedom of establishment). Read TaxNewsFlash

In the present case, the Supreme Administrative Court examined the 2019 exception rule and based on the Lexel case, concluded that the interest payment to the Irish company was deductible. The court reached the following conclusions:

  • The exemption rule is not applicable between Swedish companies that are covered by the group contribution rules. Therefore, based on the Lexel case, there is different treatment in comparable situations, thereby restricting the freedom of establishment.
  • The exception rule cannot be justified by reference to the need of preventing tax avoidance and tax evasion because the rule could capture transactions that are conducted under market terms, and consequently the rule is not aimed at purely artificial or fictitious arrangements.
  • The rule cannot be justified by reference to the balanced allocation of taxing rights between EU Member States.

Read a December 2021 report (Swedish) prepared by the KPMG member firm in Sweden


For more information, contact a KPMG tax professional in Sweden:

Caroline Väljemark | +46 768 63 99 39 |   caroline.valjemark@kpmg.se

 

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