A Swedish government committee mandated to analyze the Swedish corporate tax system - including the need for a more comprehensive approach to the overall deductibility of interest expenses, as well as the strengthening of the equity capital of companies - has proposed new corporate tax rules.
On June 12, the committee announced that it is proposing to introduce a new system for corporate taxation. The proposal is a modified CBIT (Comprehensive Business Income Tax) model. The model consists of two parts. First, deductions for interest expenditures and other financial costs will be limited by only allowing deductions for financial costs for which there is a corresponding financial income. No other financial costs will be deductible. The assessment will be made on a company group level. Should this proposal go into effect, deductions for net financial costs will be discontinued.
Second, a standard deduction will be introduced for all financing costs – a “financing allowance” – at a rate of 25 percent of the company’s entire taxable profit. This financing allowance will be allowed whether or not the company has financial costs and, in terms of the financial effects for companies, will be equivalent to reducing the corporate tax rate by 5.5 percentage points (from 22 percent to 16.5 percent).
In principle, the limitation of deductions will apply to all costs that are interest expenditures in financial terms. To avoid problems of definition, it will also apply to other financial costs.
The committee proposes a new definition of financial costs for tax purposes. This definition will be very similar to the definition of financial costs used in accounting.
The great majority of companies that conduct non-financial activities have net financial costs. Prohibiting deductions for net financial costs will mean that equity and debt are treated in the same way, for tax purposes, in companies that have net financial costs. The proposal therefore means that equity and debt will be taxed equally for the great majority of non-financial companies.
Discontinuing the deduction for net financial costs removes the tax incentive to report large interest costs in Sweden. This makes it possible to abolish the rules to prevent tax planning by means of intra loans between associated enterprises that Sweden introduced in 2009 and 2013.
The proposal will result in higher interest costs for companies with net financial costs. However, no very striking increase in costs is involved.
Overall, this proposal means a redistribution of corporate tax payments in the business sector. The change in taxation for a company will depend partly on the leverage of the company’s debts and partly on the rate of returns on the company’s investments. High interest costs will mean higher taxes. High returns will mean large financing allowance and therefore lower taxes. The overall effect will depend on which effect is greatest. The proposal means that companies with large debts and investments that yield low returns will have to pay more in corporate tax than under present tax regulations. Companies with small debts and investments that yield high returns, in contrast, will pay less in tax.
The proposal is suggested to take effect on January 1, 2016.
For more information about tax concerns in Sweden, please contact Erik Björkeson.
Erik Björkeson is a partner and head of the Tax group of DLA Nordic, based in Stockholm. You may reach him here.