Sweden lowers its corporate income tax

The Swedish government presented a proposal for new tax regulations for the corporate sector. The right of deduction for future interest expenses is one of a number of proposals which will impact Swedish companies’ tax situations. Sweden will also be more attractive to investors as the corporate income tax will be lowered to 20,6 percent as of jan 1 st 2021.

An intermediary step will be taken 2019.

The proposal in brief The proposal now presented by the Government is modified compared with the previous work undertaken in this context by the Ministry of Finance. Basically, the current proposal implies, as expected, that a new general limitation on the right of deduction is to be introduced for negative net interest in the corporate sector. This also includes interest expenses to external lenders. The right of deduction will be based on a so-called EBITDA rule and will be combined with a decrease in the corporate tax rate. The existing framework regarding deduction of intra-group interest expenses will, however, remain but the proposal implies modification of the rules.

In summary, the proposal implies the following:

  • The limitation on the right of deduction is formulated as an EBITDA rule with a 30 percent deduction limit.
  • Negative net interest which is not allowed to be deducted according to this EBITDA rule is to be carry forward during one period of a maximum of six years.
  • The allowance is increased from the previously proposed SEK 100,000 to SEK 5,000,000, which implies that negative net interest up to SEK 5, 000,000 will not be covered by the EBITDA rule.
  • The corporate tax rate will be decreased in two stages from the current 22 percent to 21.4 percent in 2019 and to 20.6 percent in 2021.
  • The previous proposal to introduce further limitations on the right to utilise fiscal deficits from previous years is abolished.
  • It is proposed that a so-called basic deduction be introduced for apartment houses for costs incurred in new construction, in making additions to existing buildings and in the reconstruction of buildings, to apply during the first six years.
  • Rules against so-called hybrid mismatching are to be introduced to hinder international tax planning.
  • Leasing rules are to be introduced addressing only the interest portion and not the right of depreciation.
  • The new regulations are proposed to come into effect on 1 January 2019.

The proposed limitation on interest expense deduction implies that the EU Directive against tax avoidance and OECD’s recommendation against base erosion and profit shifting (BEPS) are implemented on the basis of Swedish law.

Comments

The proposal presented by the Minister of Finance has been re-worked and in some aspects the Ministry of Finance has also taken into consideration the strong criticism which certain groups/associations. Amongst other things, the new proposal means that companies with negative net interest
less than SEK 5,000,000 can, overall, be seen to benefit due to the reduced corporate tax rate. The same can be said about companies in the service sector.

Both national and international companies have all reason to monitor the continued legislation process in this context. A number of interpretation issues will arise and all companies should undertake a consequence analysis of how this proposal can impact precisely their operations.

Contributed by

Per-Ake Bois, Nexia Revision Stockholm
E perake.bois@nexia.se