EU court rejects Swedish rules limiting deductions for cross-border interest payments

By Emiliha Ferrão, Transfer pricing specialist at Thorning Koponen Consulting in Stockholm, Sweden

In a ruling released January 20, the European Court of Justice found the Swedish rules on interest deduction limitations in breach of the EU law and freedom of establishment.

The ruling concerned a Swedish company that had been denied a deduction for interest payments related to an intra-group loan from its French affiliated company based on the previous Swedish interest deduction limitation rules applicable until 2018. 

According to the Swedish tax law, a deduction for interest payments could be allowed if the corresponding interest income would have been taxed at minimum 10% in the member state where the legitimate receiver of the income is tax resident. However, an interest deduction is disallowed if the main reason for the underlying intra-group loan was to obtain a tax benefit for the group.

In the years under review, the corporate income tax in France was 34.43%. The French affiliated company was loss-making, and the interest income paid by the Swedish company could be offset for tax purposes against the losses in France.

The Swedish tax agency claimed that the main reason for the underlying intra-group loan was to obtain a tax benefit and therefore denied a deduction for the interest payments to the French company.

The European Court of Justice found that the Swedish rules on interest deduction limitations contradicted the freedom of establishment according to European law because an interest deduction would have been allowed according to Swedish tax rules on group contributions, if the French company had been tax resident in Sweden. 

Hence, the Swedish rules on interest deduction limitations were deemed to restrict companies’ freedom of establishment. 

The Swedish rules could further not be justified by reference to the prevention of tax avoidance or abuse or the balance of the allocation of taxing rights between member states in the EU.

Comment

The ruling is a positive development in the Swedish legal tax environment since the rules under review tended to hit cross-border intra-group interest payments set in accordance with market conditions, i.e., the arm’s length principle.

Whether Sweden’s new rules on interest deduction limitations applicable from FY 2019 will be tested against the ruling from the EU Court of Justice remains to be seen.

Until then, companies may be able to appeal previous decisions on denied interest deductions based on the Swedish rules on interest deduction limitations for the years 2015-2018.

• Bio
• Latest Posts
• LinkedIn

Emiliha Ferrão

Transfer Pricing Specialist at Censio Tax

Emiliha is an authorized tax advisor who has worked with tax and transfer pricing for six years at several international advisory firms in Stockholm. Emiliha is a frequently engaged transfer pricing lecturer and has during recent years gained extensive in-house transfer pricing experience at large multinational companies. Censio Tax aims to simplify transfer pricing and always strives to translate theory into sustainable solutions. We are an independent full-service transfer pricing advisory firm working with consultancy as well as interim in-house solutions across the Nordics.

Latest posts by Emiliha Ferrão (see all)

• Swedish Administrative Court of Appeal did not consider multiple-year data, adjusted the taxable result - January 26, 2022
• EU court rejects Swedish rules limiting deductions for cross-border interest payments - February 24, 2021
• Swedish tax agency clarifies DAC6 transfer pricing hallmarks - January 13, 2021
• Swedish court rules against Flir Systems, upholds tax penalties of EUR 70 M (USD 76.5 M) - April 13, 2020