Tax treatment in the hands of the creditor
In Sweden, debt is typically waived through either judicial settlement (Sw. offentligt ackord) (which will not be discussed here) or through private settlement (Sw. underhandsackord) between creditor and debtor.
The waiver of debt results in the accounting loss of a receivable. Swedish tax law does not contain any explicit rules regarding tax deductibility for the exceptional loss, which the creditor company realises when forgiving a debt. The effective tax treatment, however, will depend on whether the debt is commercial or financial (e.g. loan receivables).
With respect to commercial debt, the creditor has a right to deduction only if the loss is to be considered as expenditure in order to acquire and retain income (‘general deduction criterion’). In this context, case law has ruled that this will generally not be the case if the debt is waived between affiliated companies, unless it was clear that the debt waiver was for commercial purposes. This would, for instance, be the case if (i) the debtor’s financial position is weak, (ii) no liquidation distribution is be expected in the event that the debtor should be put into liquidation, and (iii) the debtor’s insolvency is not due to a transfer of value to the creditor/affiliated company or in any other way related to the relationship with affiliated companies.
With respect to financial debt, the creditor generally cannot deduct the accounting loss for tax purposes. Loss on financial debt is tax deductible only if it results from a ‘divestment’ (Sw. avyttring) which is not the case if debt is waived by the mere settlement between creditor and debtor. This would be different, for instance, if the loan receivable is sold (i.e., ‘divested’) below nominal value (which may indeed be arm’s length if the debtor is insolvent), thus realising a (tax deductible) capital loss. The latter applies as a main rule, provided that (i) the buyer is an external party (i.e., non group company), (ii) the price is at arm’s length. It should be noted that some capital losses are not deductible according to special provisions.
Tax treatment in the hands of the debtor
The waiver of debt does not necessarily mean that the debtor is taxed on the amount of the waiver. Indeed, case law has stated that the profit resulting from the settlement between creditor and debtor is not subject to taxation, if the debtor is insolvent. In addition, the settlement must provide that the forgiveness of debt is irrevocable and definitive.
However, although the settlement may not result in effective taxation in the hands of the debtor, the debt actually waived will be offset against its tax losses carried forward, thus reducing those losses for the future. The waived debt will not be offset against deficit of the year in which the settlement was reached or thereafter.