The case
A company claimed a deduction for interest costs. The amount, just over 4 million Swedish kronor, related to interest on loans to its shareholders. The interest rate was the government's benchmark lending rate plus three percentage points.
The Swedish Tax Agency questioned the interest rate and, considering the risk and the company's need for loans, determined that an arm's length and deductible interest rate should be set at the state lending rate plus one percentage point.
The main purpose of the loan to the company was the need for liquid funds to be able to pay out the dividend to the owners as resolved by the general meeting.
The Swedish Tax Agency questioned the need for the loan, as they consider that this did not arise in the company's own interest. The company could have refrained from deciding on a dividend if liquidity did not actually permit any dividend.
Administrative Court
The Administrative Court, FR, notes that the loan arose because the company, due to a liquidity shortage, was unable to pay out the dividend approved by the general meeting to the shareholders.
The court considers that the company did not have any real need for a loan, as the company could have refrained from deciding on a dividend to the shareholders. The Swedish Tax Agency's decision on an interest rate of the government bond rate plus one percentage point may therefore be considered to be the correct level according to FR.
Administrative Court
The Administrative Court of Appeal, KR, sets out reasoning in its judgment regarding the level of the market interest rate for the company to be able to deduct its interest expenses.
According to the KR, a market interest rate must be determined in each individual case based on what the company would have to pay in interest for a comparable loan from an unrelated lender.
Factors that KR considers to affect loan requirements and interest rates are market interest rates, risk-taking and collateral, and whether the loan was made in the company's interest.
The Swedish Financial Supervisory Authority (Finansinspektionen) considers that, in the current case, the loan was granted because the company lacked the liquid funds to pay out the dividend resolved by the general meeting.
The debt relationship relates to such dividends that have remained in the company and have not been paid out to the shareholders. The company has not managed to demonstrate that there is any real need for a loan for the company or that the debt was incurred in the company's interest.
In summary, according to the KR, there are no grounds to determine the deductible interest rate in any way other than as decided by the Swedish Tax Agency, i.e. the government bond rate plus one percentage point.
Commentary
The outcome of the judgment could be interesting for many small companies and their shareholders. In connection with the proposal for new 3:12 rules, many information companies, advisors and tax consultants recommended shareholders to take as large dividends as possible before the dividend tax increase that everyone believed would come.
In other words, there may be many similar situations in other companies where an owner has lent money to their company to maximise dividend payouts. Therefore, one should annually consider which interest rate on borrowed money can be justified based on the need for the loan.
The question of taxation of the received amount by the shareholders was not tried in the court. However, previous case law on the matter suggests that the part of the interest cost for which the company did not receive a deduction should be considered a hidden dividend.
Source: Wolters Kluwer – Tax Information
