Sweden proposes new system for corporate taxation: a redistribution of tax payments in the business sector

by DLA Piper

A Swedish government committee mandated to analyze the Swedish corporate tax system - including the need for a more comprehensive approach to the overall deductibility of interest expenses, as well as the strengthening of the equity capital of companies - has proposed new corporate tax rules.

On June 12, the committee announced that it is proposing to introduce a new system for corporate taxation. The proposal is a modified CBIT (Comprehensive Business Income Tax) model. The model consists of two parts. First, deductions for interest expenditures and other financial costs will be limited by only allowing deductions for financial costs for which there is a corresponding financial income. No other financial costs will be deductible. The assessment will be made on a company group level.  Should this proposal go into effect, deductions  for net  financial  costs  will  be  discontinued

Second, a standard deduction will be introduced for all financing costs – a “financing allowance” – at a rate of 25 percent of the company’s entire taxable profit.  This  financing  allowance  will  be  allowed  whether or not the company has financial costs and, in terms of the financial effects for companies, will be  equivalent to reducing  the corporate  tax  rate  by  5.5  percentage  points  (from  22  percent  to 16.5 percent).

In principle, the limitation of deductions will apply to all costs that are interest expenditures in financial terms. To avoid problems of definition, it will also apply to other financial costs. 

The committee proposes a new definition of financial costs  for  tax purposes. This definition will be very similar to  the  definition of financial costs used in accounting.

The  great  majority  of  companies  that  conduct  non-financial activities  have  net  financial  costs.  Prohibiting  deductions  for  net financial  costs  will  mean  that  equity  and  debt  are  treated  in  the same  way,  for  tax  purposes,  in  companies  that  have  net  financial costs. The proposal therefore means that equity and debt  will  be taxed equally for the great majority of non-financial companies.

Discontinuing the deduction for net financial costs removes the tax incentive to report large interest costs in Sweden. This makes it possible to abolish the rules to prevent tax planning by means of intra loans between  associated  enterprises that  Sweden introduced in 2009 and 2013.

The proposal will result in higher interest costs for companies with net financial costs. However, no very striking increase in costs is involved. 

Overall, this proposal means a redistribution of corporate tax payments in the business sector. The change in taxation for a company will depend partly on the leverage of the company’s debts and partly on the rate of returns on the company’s investments. High interest costs will mean higher taxes.  High returns will  mean  large  financing allowance and therefore lower taxes. The overall effect will depend on which effect is  greatest.  The  proposal  means  that  companies with large debts and investments that yield low returns will have to pay  more  in  corporate  tax  than  under  present  tax  regulations. Companies with small  debts  and  investments that yield high returns, in contrast, will pay less in tax.

The proposal is suggested to take effect on January 1, 2016.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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