Interest deduction limitation rules of 2019

The Swedish Council for Advance Tax Rulings (the “Council”) has stated (SRN 21‑22/D) that an application of the business reasons rule – in its current wording in force as of 2019 – on intra‑group indebtedness in a cross‑border group, for which tax consolidation through group contributions would have been possible had the group been domestic, is not compatible with the freedom of establishment under EU law.

In the case at hand, a cross‑border group was planning several restructuring measures and the main purpose for the indebtedness was the reorganisation and the future synergies it would lead to. According to the business reasons rule in the Swedish Income Tax Act, interest on such debt is only deductible where the purchase is deemed motivated mainly by business reasons.

After assessing recent case law from the Court of Justice of the European Union and the Swedish Supreme Administrative Court, and the principles laid out therein, the Council stated that the business reasons rule of 2019 – as applied in the current case – is not compatible with the freedom of establishment under EU law. The application leads to a difference in treatment between domestic and cross‑border groups that cannot be justified.

The case has been appealed to the Swedish Supreme Administrative Court by the Swedish Tax Agency, and Schjødt's tax lawyers in Sweden are following the development closely.