New rule regarding deduction limitation on historic losses

The Swedish government has decided to introduce a new rule to further limit the possibility to deduct historic tax losses (prop. 2021/22:93). According to the new rule, historic losses in a company will be completely forfeited after a change of ownership if the losses were the predominant reason for the transaction. The assessment on what the predominant reason behind a change of ownership is, shall be made on a case-by-case basis looking at all the relevant circumstances. The rule shall enter into force on 1 May 2022 and be retroactively effective on changes of ownership after 10 June 2021.

The Swedish Income Tax Act contains certain restrictions on the deduction of tax losses which have been carried forward from previous years, i.e., historic losses. In the event of a change of ownership, in which a company acquires the controlling influence of a company with historic losses, the restrictions apply in order to prevent trade with such companies. Following a recent ruling by the Supreme Administrative Court (“HFD”), the government published a draft bill to further limit the possibility to deduct tax losses in companies with historic losses, which has now been approved by the Swedish Parliament.

In the ruling from HFD (HFD 2021 ref. 33), the court stated that neither the current restrictions on historic losses, nor the Swedish Tax Evasion Act, prevents deduction of tax losses carried forward after a change of ownership of a company whose only asset was a receivable on its parent company and a deferred tax claim. The acquisition took place by the buyer taking over the seller's debt to the acquired company. In the government’s proposal, it is emphasised that there are no commercial reasons for acquiring a company whose only asset is a receivable, if the payment for the receivable is made at a nominal amount. Furthermore, the government's view is that the transaction in the HFD ruling most likely would not have taken place if it was not for the tax losses. As such, the ruling uncovered a gap in the legislation.

The new rule will prohibit deduction of tax losses carried forward in its entirety after a change of ownership if the tax losses can be assumed to have constituted the “predominant reason” to the change of ownership. The assessment of whether the tax losses constituted the “predominant reason” shall be made with regard to the relevant circumstances in each individual case. Particular consideration shall be given to whether the acquisition has included a company that holds assets or rights other than cash and claims on companies that were part of the same group as that company before the change of ownership, or a company that conducts business.

“The predominant reason” is a subjective requirement that may risk uncertainty and unpredictability. The vagueness of the requirement risks including transactions that are commercially driven if there are tax reasons that are considered to weigh heavier. Based on the ruling and the proposal, it should however be clear that if the company with historic losses only has assets consisting of a cash register or intragroup receivables, it is probable that the tax reasons are considered predominant for the change of ownership.

The new rule will enter into force on 1 May 2022, but the change shall be retroactively applied on changes in ownership that took place after 10 June 2021. A change of ownership made thereafter may hence be subject to the new rule, and historic losses are in risk of being completely forfeited.