Limitations of the Deductibility of Intra-Group Interest Payments - The Swedish Legislation and its Compatibility with the Freedom of Establishment

Abstract: On January 1, 2009, new rules regarding limitations of the deductibility of intra-group interest payments came into force in the Swedish legislation. The rules aim to prevent the use of certain tax planning practices, where a company appropriates itself tax advantages by taking advantage of the unlimited right to deduct interest expenses. The tax advantage is ensued when the paying company makes an interest deduction in Sweden whereas the corresponding interest income is taxed at a low tax-rate or not at all by the receiving company. The rules are, in the main, limiting the deductibility of interest payments attributable to intra-group loans obtained to finance an acquisition of shares from another company member of the same group. In order to not obstruct business-motivated transactions, two complementary rules has been introduced that exempts certain transactions from the purview of the principal rule. According to those rules, interest can still be deducted on condition that either the corresponding interest income is subject to tax at a minimum rate of ten percent at the level of the receiving company or the intra-group acquisition as well as the internal loan is principally business-motivated. The expression principally business-motivated implies that the businesslike reasons have to amount to 75 percent. The rules apply to all companies that are resident in Sweden and members of a group of companies. The majority of interest paid by a subsidiary to an parent company, which are both resident in Sweden, will be deductible, since the corresponding interest income is normally subject to tax at a rate exceeding that of ten percent. As regards interest paid to a parent company resident in a state other than Sweden, it is not the matter of course that the corresponding interest income will be subjected to such taxation. Accordingly, the effect is that subsidiaries to foreign parent companies to a larger extent are affected by the rules than in case of resident parent companies. In the thesis, it argued that the difference in tax treatment caused by an application of the Swedish rules is contrary to EU law and the freedom of establishment in particular. Still, the rules can be justified by the need to prevent abuse on condition that they are only targeting wholly artificial arrangements entered into for tax purposes only. However, a requirement prescribing that the businesslike reasons have to amount to 75 percent goes beyond what is necessary, as business-motivated transactions will also be affected. This deficiency could be rectified by removing the word principally from the wording of the rule. The argumentation is based on the reasoning of the Court of Justice in the cases Lankhorst-Hohorst, Cadbury Schweppes and Thin Cap Group Litigation.