In a judgment of 20 January 2021 (C- 484/19), the Court of Justice of the European Union (CJEU) ruled that the Swedish interest deduction limitation rules which were introduced 2013 constitute a restriction of the freedom of establishment.
The Swedish provision at hand denies the tax deductibility of interest on certain types of intragroup loan arrangements (Chapter 24, section 10 a–10 f of the Income Tax Act, ITA). However, according to Chapter 24, section 10 d ITA interest on intragroup loans are tax-deductible if the income corresponding to the interest expense would have been taxed at a rate of at least ten per cent under the legislation of the state in which the beneficial owner of the income was domiciled (the ten per cent rule). This applies if the loan arrangement has not been established for the purpose of achieving a material tax benefit (the statutory exception). Interest payments between two Swedish entities (especially within a fiscal unity) will in most cases not create any tax benefit.
The interest limitation rules were introduced to protect the Swedish corporate tax base from erosion. The rules were however designed and interpreted in such a way that also loan arrangement with fully commercial terms were targeted. Swedish enterprises have generally had more difficulties being granted deductions for interest on loans from foreign group companies than from Swedish group companies.
The case in the CJEU concerned a Swedish company which had been denied tax deduction under the statutory exception for interest paid to a French group company with tax losses (generated in the French group). The question in the case was whether the statutory exception entails an unjustifiable restriction of the freedom of establishment. It should be noted that the terms and conditions of the loan arrangement was not challenged.
The CJEU came to the conclusion that the Swedish rule was a restriction that could not be justified.
The CJEU initially concluded that a restriction existed, since the interest would have been deductible if the French recipient of the interest had had domicile in Sweden. Such a difference affects the possibility for companies to exercise its’ freedom of establishment in a negative manner.
According to CJEU, the restriction could not be justified since the specific purpose of the Swedish rule was not to prevent the abusive use of wholly artificial arrangements which do not reflect economic reality.
Furthermore, the CJEU found that the rule could not be justified by the need to safeguard the allocation of powers to impose taxes between Member States, considering the fact that an interest payment to an external party (in France for example) would have been deductible.
Finally, the CJEU stated that the rule could not be justified by the concept of wholly artificial and allocation of taxing power taken together, for the reason that the Swedish rule could not be justified to safeguard a balanced allocation of taxing power on a standalone basis (see above).
According to Skeppsbron Skatt the ruling is well motivated and follows already established precedence from the CJEU.
The CJEU’s ruling affects many of the companies which have been denied deduction for interest since the rules came into effect 1st of January 2013. Most of the Tax Agency’s decisions have been appealed or may be appealed by the affected companies. According to the Tax Agency’s calculations denied deductions from 2013 amounts to 10–15 billion SEK annually. The current interest limitation rules which came into force 2019 can also be challenged on the basis of the CJEU’s ruling. For many companies, work awaits to demonstrate that the CJEU’s ruling is also applicable in their case.
In 2011 the Swedish Supreme Administrative Court ruled – without requesting a preliminary ruling from the CJEU – that the former rules from 2009 were not in conflict with EU-law. Skeppsbron Skatt has questioned the outcome and the decision not to request the CJEU to give a preliminary ruling.
Even though it is unfortunate that it has taken many years to get the question examined it is welcomed that the CJEU finally has ruled on the compatibility of the Swedish rule from 2013.
Do not hesitate to get in contact with us for advice concerning questions which are actualized by the CJEU’s ruling.