The Swedish committee of corporate taxation proposes the introduction of a new system for corporate taxation, focused on interest deductibility and other financial costs. If introduced, the previous rules restricting interest deductibility would be abolished.
The main feature of the proposed reforms is a limitation on deduction for interest expenditures and other financial costs. A limitation involves deductions only with an amount corresponding to the financial income. No other financial costs will be tax deductible. In practice this means that deductions for net financial costs will no longer be available.
A second part of the proposal involves a standard tax deduction for all financial costs. This involves a tax deduction corresponding to 25 percent of the company’s entire taxable income. The deduction will be granted irrespective of if the company actually has financial costs and this means that it could be reviewed as equivalent to a tax reduction reducing the corporate tax rate from currently 22 percent to an effective tax rate of 16.5 percent. It has been recognised that the proposed model is not suitable for banks. Nevertheless financial enterprises will be allowed to apply the finance deduction but means will be introduced whereby the banks will have to compensate for this allowance and banks are supposed to report a taxable standard income base on their total liabilities.
As the proposal will lead to there being less incentive to put financial costs in Sweden, the proposal makes it possible to abolish the rules previously introduced whereby the deduction of interest expenses was restricted.
The committee has also presented an alternative proposal that involves a reduction of the corporate income tax to 18.5 percent together with a less strict limitation of the right to deduct interest expenses. If this proposal leads to legislation it is intended that the current rules for interest deduction restrictions will continue to be in effect.
It is proposed that the new legislation becomes effective for fiscal years starting 1 January 2016.