Cross border mergers in Sweden; Whether the Swedish merger rules comply with EU law

Abstract: Background: In Sweden, mergers between Swedish parent companies and domestic subsidiaries are in most cases carried out with a continuation of the tax burden, while mergers between Swedish parent companies and foreign subsidiaries are, in principle, not. The exception is when the Swedish intra-group deduction rules apply. However, they are very limited in their scope and application. It is uncertain whether such difference in treatment between domestic and foreign subsidiaries is compatible with Sweden’s obligations towards the EU. Results: In regards to cross border merger rules, EU law makes a difference between rules which are built upon the Merger Directive and those who are not. When the directive applies, domestic and foreign subsidiaries are, in principal, to be treated in the same way. However, in regards to mergers which do not qualify for the benefits of said directive, EU law allow for some difference in treatment between domestic and foreign subsidiaries. Nevertheless, in a merger, a taxpayer must, as a minimum standard, be able to deduct losses in a foreign subsidiary, if the losses are considered final in accordance with the case law of the CJEU. Conclusion: The Swedish rules which are adopted based on the Merger Directive are incompatible with EU law. The Swedish rules applicable to other kinds of mergers are incompatible with EU law in regards to their limited loss calculation, however, compatible with EU law in regards to their limitation to factual losses.