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Proposal on new interest deduction restriction rules

Henrik Hedberg Henrik Hedberg

On 20 June 2017, the Ministry for Finance presented a proposal regarding new legislation within the corporate sector.

The background of this proposal is the Government Commission on Corporate Tax's investigation that aimed towards equalizing the taxation on borrowed capital vs. equity. The Government has previously had problems in presenting actual legislation proposals and many people and organizations believed that the Commission's investigation would not end up in a government proposal. However, evidently the Ministry for Finance has published this extensive proposal with the purpose of "strengthening the competition and to create a dynamic corporate culture"

Swedish legislation comprises rules permitting full deduction for interest costs on borrowed capital. Only when the receiver is taxed low or exempted from tax on the interest income from related parties, there are limitations on the deductibility of interest. These limitation rules are complicated and have even been criticized by the EU to not be in line with EU-legislation.

The Swedish Ministry for Finance proposes the following (which now will be submitted to interested parties for comments):

  • Current interest deduction restriction rules are made narrower only to be applicable on what the Ministry of Finance calls tax planning.
  • A general limitation of interest deduction through only permitting 35% of EBIT,
  • As a second option a limitation of interest through only permitting 25% of EBITDA
  • The corporate income tax rate is lowered from 22% to 20%
  • Deduction limitations on interest connected to certain cross-border hybrid situations
  • New rules in relation to financial leasing agreements
  • Depreciations on new buildings (office and apartment buildings) through an easement rule
  • Tax losses carried forward can for a period of 2 or three years (depending on which rules is enacted) only be utilized up to 50% of the taxable income, i.e. 50% of the taxable income is always taxed regardless of the amount of tax losses

What will be the consequences?
The proposals are complex and it is rather difficult to foresee the effects at this stage. It is clear however, that for a debt free company, the proposed rules will mean a pure tax cut. On the other hand, the rules will for a highly leveraged companies, result in a tax increase that will increase in correspondence to the company taking up more debt.

To smoothen out the effects of the proposal and not to decrease the willingness to build more residential buildings, a special rule (see above) is proposed.

In a polemical article (Dagens Industri, 19 June 2017), The Minister for Finance Magdalena Andersson says that she is looking forward to receiving the proposal back from the parties to whom it has been submitted for comments and that the government subsequently will revert with a final proposal.

The criticism from the real estate sector was massive when the Government Commission on Taxation of Property (SOU 2017:27) presented its proposal for new legislation on real property taxation. In many parts of Sweden new construction of office and residential buildings is much needed. It is of interest to see how the real estate sector will perceive the proposal and, if it will be of the opinion that the proposed easement rule will be sufficient to stimulate new construction.

Since the government does not have majority in parliament it is difficult to determine how far the proposal will proceed in the legislative process.

Grant Thornton experts will now go through the proposal more thoroughly and subsequently present a deeper analysis.

The changes are proposed to enter into force as at 1 July 2018.