100,000 SEK, that will be the maximum annual deduction for a negativ interest net according to a simplified alternative if a new draft leads to legislation.
The draft consists of many tax changes. I have written about it in Swedish at the web page of RedovisningsHuset i Södertälje AB, Ränteavdrag slopas för företag – nästan.
The main object is to prohibit tax planning with deduction of interests, above all internationally.
Deductions for interests are not totally stopped, but the limitations will make it feel like at stop for companies with high debts and low earnings.
The draft was sent for comments on June 20, 2017. Comments can be made until September 26, 2017. The plan is to have the new regulations in force for fiscal years beginning July 1, 2018 and later.
Several Limitations for Deductions of Interests
The object of the limitations is the net interest, calculated as interest incomes reduced with interest expenses. A positive net is fully taxable, but a negative net will only be deductible within the new limitations.
The Swedish government have asked for opinions on which deduction base to choose, EBIT or EBITDA, for calculation of the deduction of net interest.
- Main option: Up to 35 % of EBIT (Earnings Before Interest and Tax)
- Alternative option: Up to 25 % of EBITDA (Earnings Before Interest and Tax, Depreciation and Amortization)
Only one of the options will be included in the legislation.
As a simplified alternative, a company may chose to deduct up to 100,000 SEK for a negative interest net. In this alternative it’s not necessary to calculate the EBIT or EBITDA.
For company groups the limits shall be calculated as a total for all the companies in the group. That applies to all alternatives, EBIT, EBITDA and 100,000 SEK limit. The argument is to stop planning by dividing a company with a high negative interest net into several companies, to increase the total deductions.
An exceeding negative interest net can be saved for future deductions up to six years.
Reduced Corporate Income Tax
To compensate the companies for tax consequences of the new limits, the corporate tax is to be reduced from today’s 22 % to 20 %.
No Hybrid Mismatches
International tax planning with interests, between countries with different tax regulations, are to be stopped by totally stopping interest deductions in those cases.
No Interest Included in Assets
Companies can, if they want to, include interest related to investments that takes long time to complete, thus increasing the accounted value of the asset and accordingly decreasing the interest expenses.
In the draft the government proposes to stop this accounting possibility, to ensure that the deduction limits of negative interest rates are not evaded.
Tax Regulations for Leasing
Sweden doesn’t have any specific tax regulations for leasing, but in the draft such regulations are proposed. The purpose is to stop tax planning by eliminating negative interest nets with loans changing to leasing.
All financial leasing agreements shall be accounted for as if the company have bought the asset. This way the leasing fees are to be divided in amortization and interest.
Today only larger companies have to account like this, and then only in the consolidated accounts. The draft will lead to that larger companies have to account in the same way in the juristic person. Accounting regulations for smaller companies prohibit this way of accounting to day, but in the draft the government simply leaves that problem to the standard setting body The Swedish Accounting Standards Board (Bokföringsnämnden, BFN) to solve.
My comment: These regulations might, if they lead to legislation, have to be amended already within a few years since the new standard on leasing from IASB isn’t considered. In that new standard all leasing agreements will have to be accounted for as if they are financial leasing agreements, also the operational leasing agreements.
Untaxed Reserves Gets More Expensive
Swedish companies have a possibility to partially save earnings taxfree in reserves, but have to pay a standard tax as an interest on these reserves (”Periodiseringsfonder”). The draft proposes a raise of the standard tax to follow the new limitations of interest deductions.
Raised Depreciation for New Apartment Building
Real estate companies can face big problems with the new limitations of interest deductions, since they usually have high negative interest nets compared to their earnings.
The government is especially concerned of not disturbing the speed of building new houses for living, since Sweden is experiencing a great lack of housings. Therefor the draft includes a new ”primary deduction” for tenant buildings of 2 % annually the first five years after completion.
Normally 2 % per year can be deducted for an apartment building, meaning 50 years of depreciation time. With the primary deduction totally 4 % can be deducted per year in the beginning but after five years we’re back to the normal 2 % anually again, meaning 45 years of depreciation time.
Limited Carry Forward of Losses
Sweden have a system of carry forward losses. One years loss is deductible upcoming years, without limitation in time. The draft proposes that for two or three years after legislation only 50 % of saved losses will be deductible. The purpose of this temporary limitation is to help financing the reduced income tax, the primary deduction for new housings and more.
In my book ”Performance and Income Planning” (Resultat- och inkomstplanering) from 2015 I described these possible future changes in chapter 7.3 ”Company taxation committee” (Företagsskattekommittén), page 188-193, so I hope my readers are well prepared!
In my book ”Real Estates” (Fastigheter) from 2016 the possible changes of depreciation for new tenant buildings are of interest for chapter 4 ”Depreciation” (Avskrivningar).
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