Background
The government's proposal for new corporate taxation to counteract aggressive tax planning will primarily affect large companies, while other parts of the proposal will affect all legal entities.
In this article, we outline the parts of the proposal that will apply generally to all legal entities.
Reduction of corporation tax
The government states that the changes in the current bill allow for a reduction in the corporation tax rate from 22 per cent to 20.6 per cent. However, the reduction will be implemented in two stages. For tax years beginning after 31 December 2018 but before 1 January 2021, the corporation tax rate will be 21.4 per cent, after which it will be lowered to 20.6 per cent.
The equity investment fund tax is also being lowered to 20.6 per cent for financial years beginning after 31 December 2020. Until then, it remains at 22 per cent.
Template income for appropriations/provisions funds
The template interest rate for appropriation accounts is proposed to be raised from 72 per cent of the government bond rate multiplied by the sum of deductions made to the entire government bond rate.
Furthermore, it is proposed that provisions made before the reduction in corporate tax should be reversed at a higher level. Deductions for provisions to the appropriation reserve made at a corporate tax rate of 22 per cent shall be reversed at 103 per cent of the deduction for legal entities making the reversal before 2021, and at 106 per cent of the deduction if the reversal is made later.
For deductions made to the corporation tax of 21.4 per cent, the reversal shall be made at 104 per cent of the deduction after 2021.
No limitation of deficit deductions
The memo proposed a temporary restriction on legal entities' deduction for previous years' deficits. The government is not proceeding with that proposal.
Interest according to new rules
The concept of interest is extended to include, in addition to expenses for credit, expenses comparable to interest. However, rules on interest for financial leasing agreements only cover legal entities and partnerships owned by legal entities. A further condition for the interest portion of the leasing fee to be treated as interest is that the total leasing fees for financial leasing agreements incurred by companies within the same interest group exceed one million Swedish kronor for the tax year.
Interest expenses shall not be included in the acquisition cost of inventory, buildings, land improvements, and fixed assets. This also covers intangible fixed assets developed in the company's own business operations.
Background to new rules on interest deduction limitations
In the spring of 2013, the OECD began work to address aggressive tax planning. Two years later, 13 reports and a summary document were published, which together form what is known as the BEPS package. This contains, among other things, a general limitation of deductions for net interest expenses and measures against hybrid mismatches.
The European Council adopted a directive against tax avoidance based on BEPS in the summer of 2016. The directive must be implemented in the Member States by 1 January 2019.
In Sweden, restrictions on the deductibility of interest expenses for internally financed share acquisitions from companies within a group of interest were introduced as early as 2009. The purpose of the rules was to prevent extensive tax planning with artificial interest deductions within international corporate groups. The rules were extended in 2013 to include interest expenses for all debts for companies within a group of interest. Subsequently, the Swedish Tax Agency has issued statements and the Supreme Administrative Court has rejected a large number of advance rulings on the subject.
The rules on interest deductibility limitations have been criticised by the European Commission, and the Corporate Tax Committee proposed in its report in the summer of 2014 rules that would allow the complex regulatory framework to be removed. The intention of the new rules is to achieve neutrality between a company's debt-financed investments compared to investments financed with equity. Differences in countries' legislation have also made it possible for companies in a common interest with companies in other countries to use various financial instruments, also called hybrids, to evade tax.
In the summer of 2017, three years after the Committee on Corporate Taxation's report, the Ministry of Finance issued a memorandum with proposals for new tax rules for the corporate sector. The intention was to fulfil the directive's requirements by 1 July 2018. However, the proposal has faced extensive criticism and the government bill has been delayed. Now that it has been presented in May 2018, the intention is for the new rules to apply from 1 January 2019.
Which companies are affected by the new interest deductibility limitations?
According to the Directive, a limit may be introduced whereby net interest may always be deducted up to a fixed amount of EUR 3,000,000. The memorandum proposed a Swedish level of SEK 100,000, which was strongly criticised. The government now proposes that the limit be set at SEK 5,000,000, which is in line with what applies in Norway and Finland. This so-called simplification rule means that the majority of Swedish companies do not need to determine any deduction basis (EBITDA basis).
The amount limit applies cumulatively to companies that are part of an interest group. Companies within an interest group are, in this context, companies that are part of a group according to Chapter 1, Section 4 of the Annual Accounts Act (1995:1554) (ÅRL). In simplified terms, the ÅRL definition means that if a company, the parent company, owns more than half of the votes in another legal entity, the subsidiary, then the companies are part of the same group. The parent company may be a Swedish limited company or a Swedish partnership. A subsidiary can be both a company and another legal entity, and both Swedish and foreign. The simplification rule may only be applied if the distribution of the amount within the interest group is openly disclosed in the tax return for a tax year that has the same tax return due date.
The separate article with the other proposals will be published. This includes, among other things:
– a general interest deduction limitation meaning that net interest expenses can only be deducted up to 30 percent of tax-based EBITDA, which is earnings before financial items, taxes, and depreciation
– prohibition of deductions for interest expenses in certain cross-border situations for companies in a community of interest in order to neutralise the effects of hybrid mismatches
– to narrow the rules on targeted interest deductibility limitations from 2013
– definition of interest in connection with the deduction limitations
– the meaning of the rules on financial leasing agreements
– initial deductions for new construction of apartment buildings.
Entry into force
The rules are proposed to enter into force on 1 January 2019 and apply to tax years beginning after 31 December 2018.
Source: Wolters Kluwer – Tax Information
