Sweden introduced general earnings stripping rules and amended pre-existing interest deduction limitation rules for certain intra-group loans effective 1 January 2019, in line with the EU Anti-Tax Avoidance Directive (ATAD).
The earnings stripping rules restrict the net interest expense (interest expense less interest income) deduction to 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA). The restriction applies on net interest expense exceeding SEK 5 million at a group level. The non-deductible portion of the net interest expense may be carried forward for up to 6 years provided there is no change in the ownership, unless within the same group.
As regards intra-group loans, interest payments are allowed as a deductible expense where the interest income is subject to tax at a rate of at least 10% in the hands of the beneficial owner of the interest, or the beneficial owner is domiciled in an EEA country or the beneficial owner is domiciled in a country with which Sweden has a tax treaty. However, in such cases also, the interest expense deduction may be disallowed where the main purpose of the intra-group loans is considered to be for obtaining a substantial tax benefit (exception to 10% rule).
Further, the interest expense may not be allowed as a deduction where the same has already been deducted in another state or it is not taxable in another state.
In this connection, the Court of Justice of the European Union (CJEU) (in Case C 484/2019) on 20 January 2021 ruled that the Swedish anti-abuse rule relating to the restriction on intra-group interest deductions constituted a violation of the freedom of establishment and, hence, the interest deduction cannot be denied in cases of transactions carried out at arms’ length.
The Court also made the following observations:
- The rules resulted in differing treatment based on the location of the finance company. The Swedish entity could have deducted the interest expense if the finance company was based in Sweden, considering the Swedish group contribution rule;
- The exception to the 10% rule may cover transactions carried out at arm’s length and hence, not in the nature of wholly artificial or fictitious arrangements; and
- The Swedish rules cannot be justified by the need to preserve the distribution of taxing powers between the Member States.
Further, on 13 December 2021, the Swedish Supreme Administrative Court issued a similar ruling (in Case 10-20/D) wherein it held that although the above CJEU decision addressed the prior version of the anti-abuse rule, the reasoning provided by the CJEU applies to the revised anti-abuse rule also. Therefore, the revised anti-abuse rule in its current form is also contrary to the freedom of establishment.