In review: acquisition and leveraged finance in Sweden

An Extract from The Acquisition and Leveraged Finance Review, 6th Edition

Overview

Bank financing is still the most common source of acquisition finance on the Swedish market, although the bond market is currently an attractive alternative for refinancings. The Swedish leveraged finance market in general has long been virtually dominated by bank finance (sometimes with additional mezzanine financing on top), but direct lending is increasing, in particular from debt funds. The big Nordic banks are still the biggest lenders; however, the interest of the other European banks continues to increase. In many ways, the market is now very similar to the way the market was prior to the last banking crisis; the market is back to a 'cove-lite/cove-loose' market, but the lenders have during the most recent months become slightly more careful in negotiations.

The Swedish corporate bond market has, at the same time as it has grown, become increasingly harmonised. For instance, independent agent functions are now well established, although the automatic right for the agent to represent the bond holders before court has not been confirmed in any court cases. In 2013, the Swedish Securities Dealers Association published for the first time a draft of harmonised terms and conditions for high-yield corporate bonds. The draft terms and conditions have been further developed and found general acceptance on the Swedish market as a starting point for non-commercial terms and conditions for Swedish corporate bonds.

Note that this chapter describes, unless otherwise stated, features with application for unregulated legal entities, primarily limited liability companies, and that other rules may apply for regulated entities, other types of legal entities or natural persons.

Regulatory and tax matters

Banking and financing services provided in Sweden are regulated by, inter alia, the Banking and Financing Business Act. Banks having a licence in one Member State of the EU can passport the licence they have in their home country into Sweden and register for cross-border services or open a Swedish branch. However, a foreign company does not need a licence or to be incorporated locally solely to lend to Swedish entities (unless combined with accepting deposits from the public) or to obtain security over assets located in Sweden, including acting as a security agent on behalf of other lenders.

Special licensing requirements apply to consumer lending, but this chapter will not describe rules applicable to consumer lending or consumer legislation.

Listed corporate bonds are subject to listing requirements (however, it is not a legal requirement to list the bonds) of the Swedish Financial Supervisory Authority and the regulated market where they are listed (if applicable), for example, the rulebook for issuers from Nasdaq Stockholm as applicable on its regulated market, and, inter alia, requirements regarding the prospectus for listing and rules regarding market abuse and disclosure obligations.

Since Sweden is a Member State of the EU, banks, investment firms and funds are subject to a growing number of regulations and among the most obvious newer regulations are the amendments to the CRR Regulation and PSD2. As has been the case for other European banks, this has led to increased efforts among domestic banks to keep up with the compliance work required by such rules and regulations both from a legal and a financial or structural perspective. This may increase the competitiveness (at least to some extent) and business opportunities for less regulated sources of funding, such as alternative debt providers.

In connection with leveraged financing in general, profit repatriation and servicing of debt by the target group are arguably the two central tax considerations together with the rules concerning tax consolidation. These must be analysed in detail in each specific case.

Profit repatriation and servicing of debt may be done through dividend distributions. A dividend from a Swedish subsidiary is tax-exempt to the extent covered by the participation exemption. These rules exempt gains made on a sale of 'business-related shares' from Swedish capital gains tax (a corresponding loss is not deductible), and a dividend on such a shareholding would not be taxable. Dividends from foreign jurisdictions are generally tax-exempt, provided that the subsidiary is the equivalent of a Swedish limited liability company and covered by the participation exemption rules. This is a key concern to analyse with local counsel in other jurisdictions when structuring an acquisition.

Profit repatriation and servicing of debt may also be done through interest payments on intragroup loans. Interest payments received constitute taxable income. Interest payments made by Swedish companies are tax-deductible provided the interest level is set at arm's-length and the debt is not contrary to the interest deduction limitation rules. Due to recent changes in pertinent legislation tax, deductions for negative net interest is only allowed up to an amount corresponding to the higher of (1) correlative to 30 per cent of the company's EBITDA, or (2) of 5 million kronor for the group. Companies are free to choose between these two alternatives, but as other factors play in, it is advisable to consult with tax advisers before making the decision.

The Swedish tax consolidation system provides for group contributions between group companies as a way of consolidating for tax purpose. The criteria are, inter alia, that ownership exceeds 90 per cent of the share capital at each step of the procedure. The group contributions are taxable in the receiving company and tax-deductible in the paying company, meaning that profits can be shifted to a loss-making company in the same group and offset against the tax losses. Group contributions require sufficient distributable reserves in the providing company since group contributions are considered to be dividends for company law purposes. In profitable companies with no negative equity, this should not be a problem as long as the amount contributed does not exceed annual profits. However, group contributions are only possible between companies that have been in the same group for the entire financial year, or (much simplified) since the subsidiary began conducting business of any kind.

There are no withholding taxes on interest payments or domestic dividend distributions (unless paid to physical persons or the estate of a deceased person in Sweden) under Swedish law, but a dividend distribution to a non-Swedish company does, in principle, trigger a 30 per cent withholding tax. In practice, however, this withholding is usually avoided as a result of applicable exemptions under domestic law in which (much simplified) the receiving entity is comparable with a Swedish limited liability company or it is a beneficiary under a comprehensive tax treaty. Furthermore, holding requirements may apply. The domestic rules are more generous than the minimum requirements under the Parent–Subsidiary Directive.