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Sweden proposes limiting the deduction of financial costs & reducing CIT
2 options have been presented by the Committee (both options limit negative financial net income):
- "Main Proposal": no deduction for negative financial net income. As compensation a standard deduction of 25% of taxable income is introduced, lowering the effective corporate tax rate to 16.5%
- "Alternative Proposal": negative financial net income up to 20% of an adjusted EBIT basis is deductible. As compensation the nominal corporate tax rate is lowered to 18.5%
For the banking and financial sector, as financial expenditure generally does not exceed financial income, an additional tax on a standard income is proposed. Moreover, as part of the financing of the proposals, a one-time 50% reduction of tax losses carry forward is proposed from years preceding the entry into force.
Proposal for limiting financial costs and reduction of tax rate
The purpose of the proposal is to increase neutrality in the treatment of equity and debt. The Committee presented 2 alternatives:
- The “Main Proposal”: financial costs are deductible up to the amount of financial income. A positive financial net income is included in the taxable base and taxed with corporate income tax. A negative financial net income is non-deductible. Furthermore a standard deduction corresponding to 25% of the taxable income is introduced. The taxable income is then taxed with corporate income tax at a rate of 22%. As the taxable income is reduced by a quarter, the effect is a reduction of effective tax rate by a quarter, giving an effective tax rate of 16.5%
- Under the “Alternative Proposal”: a positive financial net result is included in the taxable base and taxed with corporate income tax. A negative financial net result is deductible up to 20% of an adjusted EBIT level result. An exceeding non-deductible negative financial net result may be carried forward for up to 6 years. Furthermore a reduction of the nominal corporate tax rate with 3.5% is proposed in the Alternative Proposal, resulting in a nominal tax rate of 18.5%.With the Alternative Proposal, the current Swedish interest deduction limitation rules on loans between affiliated parties will also be kept. These current limitation rules are highly criticised for their complexity
The net financial result is calculated individually for Swedish corporations within a group. Where the Swedish corporations have full group contribution possibilities it is possible to transfer a negative financial result in one company to a company with a positive financial result and therefore consolidate the financial results for Swedish group companies.
Bank and financial sector
An additional tax, based on the Swedish bank stability fee, is proposed for the bank and financial sector. Corporations within the banking or financial sector have to report an additional standardised income amounting to 0.24% (in the Alternative Proposal 0.12%) of the financial corporation’s debt.
The purpose of this taxation is to compensate for the effect of the proposals. This is because banks will always have a positive net financial result and will not be affected by the deduction limitations. At the same time banks will benefit from the standard deduction and a lower tax rate.
Reduction of tax losses
As part of financing the proposal a reduction of 50% of tax losses carried over to financial year 2016 is proposed.
The current Swedish rules limiting interest deductions of group loans have been subject to massive criticism (in force since 1 January 2013), mainly due to the complexity and the unpredictability of the rules. The proposals from the Committee follow directives given 3 years ago so they have been highly anticipated. However the Committee’s proposal is already being criticised for deviating from common principles of tackling the difference in treatment between debt and equity in the international community. For example most Nordic countries have an EBIT/EBITDA limitation of interest deductions.
Perhaps not surprisingly, specifically the part containing a 50% reduction in losses carry forward has been criticised for containing elements of retroactive legislation and confiscation. For instance the US National Foreign Trade Council has written a letter to the Swedish Minister of Finance expressing deep concerns for the stability of Sweden’s tax regime, which may have a significant effect on investment into Sweden.
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The proposal is currently out on referral. In the legislation process – if applicable - the referral is followed by a government bill with the final proposal.
Should the proposal become legislation there are clearly some winners and some losers. Losers are eg capital intensive businesses, such as real estate companies or entrepreneurial research companies which typically have heavy losses in the investment phase and which historically they have been able to set off against future profits. Obvious winners are companies that are profitable and self-financed.
As 2014 is an election year in Sweden it is very difficult to predict what will happen with the Committee’s proposal going forward. Notably the current Government has ordered a long referral period likely to ensure that the referral process is finished after the elections.
While it is difficult to say what will come out of the proposal, it is recommended that multinationals investigate the impact the 2 alternative proposals could have on their operations and what measures should be taken to mitigate these effects.
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