Before 2009, the Swedish Tax Agency (the “STA”) had identified and challenged, without success, the structures benefitting from interest deductions in relation to intra-group loans. As a consequence, the STA had then called for a change to the rules in order to limit what was perceived as tax avoidance. In 2009, new rules were introduced limiting deductions on certain intra-group interest payments. These rules, in turn, were broadened in 2013 since the ones originally introduced had proven to be insufficient for the purpose of limiting tax planning of multinational enterprises by the use of interest deductions. Through these changes, the main rule according to which the interest of a loan is deductible, then became an exception, at least in the case of intra-group loans. In order for this exception to apply, multinational enterprises must, somewhat simplified, pass a rather cumbersome test of “sufficient business purpose” for the interest deductions, which – in all fairness – is basically a rather subjective criterion, and the evaluation of what is sufficient business purpose may vary depending on the individual evaluating the case from their own perspective.
Like many other countries, Sweden has struggled to find a way to impose restrictions on interest deductions while simultaneously fulfilling the requirements imposed by, inter alia, the European Union (the “Directive on a Common System of Taxation Applicable to Interest and Royalty Payments made between Associated Companies of Different Member States” first adopted by the European Union on 3 June 2003 (2003/49/EC) as amended) as well the reasonable expectation from taxpayers that rules can be applied in a foreseeable way. This, in turn, has been combined with an increasing global focus on tax planning forcing governments to take action and to do it swiftly.
In early May 2016, the Swedish public service television company broadcasted a survey focusing on the cases where the STA had challenged the interest deductions made by 29 of Sweden’s largest companies relying on the rules of 2013 (more information here). Minister of Finance Magdalena Andersson commented on this saying that the Ministry of Finance was currently working on revising the interest deduction limitation rules and that the STA had received, and would continue to receive, additional funds in order to curb tax avoidance. In total, the STA has denied multinational enterprises’ interest deductions totaling SEK 16 billion since 2013. A first draft outlining two potential solutions for even further limitations was published already in 2014, but both proposals were heavily criticised and are subject to further analysis. It is not clear when the new proposal will be published, but it has been communicated that the new rules would enter into force no earlier than 1 January 2017. Hence, it may be that an updated proposal is not far away.
Some of the STA’s decisions have been appealed and all of them are likely to reach the Administrative Court (as a first instance) and may later have to be decided on by the Administrative Court of Appeal or, in rare cases, the Supreme Administrative Court. The total number of cases is likely to be substantial and, consequently, a large number of taxpayers will face uncertainty as regards their final tax liability for many years to come.
The rules introduced in 2009 and 2013 have proven to be effective in the sense that the STA now has a tool against tax avoidance in the form of intra-group interest deductions. Further, the somewhat vague and unpredictable nature of these rules is likely to have been equally effective in preventing companies from entering into transactions where even minor uncertainty as to the applicability of the rules exists. However, one could presume that the tax administration would also benefit from rules that are straightforward to apply, unlike the ones implemented in 2013, since auditing and litigating these tax dispute cases consumes resources that could be used elsewhere.
As a conclusion it can be said that several of Sweden’s largest companies mentioned in the programme, will have to face scrutiny, not only from the STA, but also from the public eye. This double scrutiny is the result of the unpredictable rules that even the most experienced tax inspector or lawyer would have a problem understanding and applying. One may question whether this is fair or not, but without taking sides, one can at least hope that the Swedish Government, when revising the rules for the third time, learns from the history and this time makes the rules reasonably straightforward to apply. Both the tax administration and the taxpayer would benefit equally from such an outcome.
Counsel at Hannes Snellman