Currently, the Swedish income tax legislation contains no thin capitalisation rules. In a new Government Bill, the Swedish Government proposes to introduce new thin capitalisation rules aimed at limiting the tax deductibility of interest on certain loans made between group companies ("internal loans"). The proposed legislation is expected to come into force on 1 January 2009. The proposed rules can be classified as special tax avoidance rules.  

The Swedish Tax Agency has drawn the Government's attention to a number of tax schemes whose sole intention is to create internal group loans that give rise to tax deductible interest. Such internal group loans were created by way of debt financed transfers of shares in subsidiaries to newly established Swedish holding companies forming part of the same group. Under the Swedish tax consolidation rules, the interest payments on the internal loan would be deductible against taxable profits of the transferred company. The recipient of the interest payments was usually an entity resident in a low tax jurisdiction.  

Under the proposed rules, interest expenses from debts to a legal entity within the same corporate group are not deductible if the internal loans are made in order to finance an internal group transfer of securities, i.e. transfer of securities from a group company to another group company ("Qualified Loan").  

However, these rules will not apply to the following situations:  

  1. where the recipient company's interest income from the Qualified Loan would have been subject to income tax at a rate of at least 10% under the law of the jurisdiction where the recipient is a tax resident (assuming that the recipient company's only interest income is the interest income from the Qualified Loan); or
  2. where the internal transfer of the securities, as well as the group internal debt, is justified by business or commercial reasons.  

Certain types of entities (for example Swedish investment companies) are entitled to deduct distributions to shareholders. The Bill contains special rules regarding such companies with the aim of maintaining the requirement that interest income received from Qualified Loans is taxed at 10%.  

In order to prevent circumvention of the new legislation, "back-to-back-loans" (an external party acts as both borrower and lender and receives a net amount of interest income) will be treated as internal loans. Furthermore, under the new rules, internal loans replacing temporary external loans that were taken in relation to an internal security transfer will be regarded as an internal group loan.