COMMITMENT FEES AS EXPENSES FOR CREDIT

Under the Swedish interest deduction limitation rules, introduced in connection with the implementation of the EU Anti-Tax Avoidance Directive, interest expenses are defined as interest and other expenses for credit, as well as expenses comparable to interest. The definition targets interest in an economic sense and covers various fees charged by lenders, whereas fees more in the nature of service charges fall outside.

The company was considering financing an acquisition through a flexible credit facility with a five-year term. Market interest would be paid on drawn amounts, while a commitment fee would be calculated on the undrawn portion. The Swedish Board of Advance Tax Rulings had held that the fee was not an expense for credit, as it related to a facility merely being kept available rather than to capital actually borrowed.

HFD took the opposite view, holding that the credit facility should be viewed as a whole for which the company pays consideration in two ways: interest on the drawn portion and a fee on the undrawn portion. The fee is thereby part of the consideration for the financing solution and constitutes an expense for credit, including where no part of the facility is ever drawn. External advisory costs relating to the financing were, however, held not to constitute expenses for credit.

Commitment fees accordingly fall within the scope of the interest deduction limitation rules, including the general limitation based on a company’s tax EBITDA.