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Proposals to Limit Interest Deductions

November 2008 - Tax & Private Client. Legal Developments by Wistrand.

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Government proposes change in limitations regarding interest deduction for internally financed acquisition of shares (etc.) in a privity (unity of interests).

The government has proposed limitations regarding interest deduction for internally financed acquisition of shares (etc.) in a privity (unity of interests). The proposal has been actualized due to two cases from the Supreme Administrative Court. The changes inter alia entail limitations for Swedish companies to make interest deduction for internally financed acquisition of shares (etc.) in a privity.

Background The general rule in Swedish tax law is that interest deduction can be made regardless if the interest deduction has any connection to acquiring of the incomes. This feature, including some other features, in the Swedish tax law has given birth to quite substantial tax planning, often including companies outside Sweden. Due to two cases (RĂ… 2001 ref. 79 and RĂ… 2007 ref. 85) from the Swedish Administrative Supreme Court this type of tax planning can not be attacked with the Swedish law regarding tax avoidance. The Swedish tax agency has estimated that this type of tax planning reduces the tax income by 7 billions SEK and has therefore submitted a proposal to the Swedish government inter alia regarding limitations in interest deduction for internally financed acquisition of shares (etc.) in a privity. The proposal is not intended to include interest deduction that is made for commercial reasons. 

Proposals The proposal entails inter alia the following: 

  • A new definition of the term privity/unity of interests
  • The general rule: Companies that is included in a privity can not deduct costs of interest  regarding a debt to a company in the privity if the debt concerns acquisition of a share (etc.) from av company that is included in the privity
  • The limitations in interest deduction are also applicable if a company in the privity has a temporary loan to a company outside the privity (i.e. a bank) if the loan is refered to acquisitions of shares (etc.) in a company in the privity, given that the temporary loan has not arisen due to commercial reasons.
  • Exceptions: (1) If the income that corresponds to the interest income would have been taxed with a taxation rate of minimum 10 percent according to the lax laws in the country in which the company that in fact has right to the income is situated, if the company only have had that income.

(2) If both the acquisition and the debt regarding the interest costs mainly are motivated by commercial reasons. 

Comments We believe that the proposal in its current formulation is quite adapted to its purposes.  

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