European Commission may challenge Swedish interest limitation rules

10 April 2013
Global
Tax Alert
European Commission
may challenge Swedish
interest limitation rules
The Swedish Government recently responded to a letter from the
European Commission questioning the compatibility of the Swedish
interest limitation rules with European Union (EU) law. Interest deductions
may potentially be allowed by reference to EU law, and possibilities of
reclaiming previously paid taxes may arise should the Commission bring
an action before the European Court of Justice.
Background
Interest limitation rules
As of 1 January 2009, the Swedish Income Tax Act contains rules limiting
the deductibility of interest expense. The present version of the rules, in
force as of 1 January 2013, limits as main rule deductibility with regard to
all intra-group loans. Further, the rules apply to certain external fi nancing
related to internal acquisitions of shares, primarily in respect of so-called
back-to-back loans.
Deductions are allowed if either of the two available exemptions is
applicable. Under the ten percent rule, deductions shall be allowed if the
interest income corresponding to the expense would be taxed at a rate of
at least ten percent in the hands of the benefi cial owner had the interest
been the only income of the recipient/benefi cial owner. Specifi c rules apply
with respect to situations where the recipient of the interest income is
subject to yield tax (e.g., life insurance companies). The ten percent rule is
not applicable where the debt relationship has been created predominantly
to provide the group with a substantial tax advantage.
Further, the business reasons exemption provides, subject to certain further
requirements, that interest expense shall be deductible if the debt
relationship is predominantly motivated by business reasons.

2
Supreme Administrative Court
judgment
The Swedish Supreme
Administrative Court ruled in
November 2011 that the previous
version of the interest limitation
rules (in force until 31 December
2012) was not contrary to the EU
freedom of establishment principle.
The Supreme Administrative Court
considered that the ten percent rule
could potentially be discriminatory
from the perspective of EU law.
However, the Supreme
Administrative Court concluded
that any difference in treatment
of internal and cross border
transactions was merely due to
divergences between the tax
systems of the various member
states and did, therefore, not
constitute a restriction of freedom
of establishment.
Challenge from the European
Commission
The European Commission does
however not fi nd the judgment
of the Swedish Supreme
Administrative Court persuasive
given that the ten percent rule in
practice only applies in cross border
situations. Further, the Commission
holds that the restriction cannot
be justifi ed under the so called
rule of reason (justifi cation due to
an overriding reason in the public
interest). Accordingly, Sweden
failed to fulfi ll its obligations
under EU law in the view of the
Commission.
The Swedish Government has
replied, in a 40 page response to
the Commission, that it agrees
with the view of the Supreme
Administrative Court that there is
in fact no restriction, and has
further argued that there should
in any case be the possibility to
justify the limitation rules.
A potential justifi cation fulfi lling
the requirements laid down by the
European Court of Justice would
entail that the rules would not be
contrary to EU law.
Comments
There is a position in favor of the
view that the interest limitation
rules are contrary to the freedom of
establishment principle. Assuming
Global Tax Alert
the Commission maintains this
position, the next step would be
a “reasoned” opinion to which
the Swedish Government would
in turn respond. The Commission
can thereafter decide to bring an
action against Sweden before the
European Court of Justice, asking
the Court to declare that Sweden
has failed to fulfi ll its obligations
under EU law.
The letter from the Commission
opens a door for the rules to be
tried by the European Court of
Justice. Under these circumstances,
it would be prudent to consider
whether any previously paid taxes
could be reclaimed based on a
reassessment or whether future
interest expense may be deductible
by reference to EU law. Companies
may also want to consider the fi ling
of protective claims.

For additional information with respect to this Alert, please contact the
following:
Ernst & Young AB, Stockholm
• Rikard Ström +46 8 5205 9208 rikard.strom@se.ey.com
• Erik Hultman +46 8 5205 9468 erik.hultman@se.ey.com
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
• Dr. Klaus von Brocke +49 89 14331 12287 klaus.von.brocke@de.ey.com
Ernst & Young LLP, Scandinavian Tax Desk, New York
• Martin Norin +1 212 773 2982 martin.norin@ey.com
3 Global Tax Alert
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