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To What Extent Can Member States Have Anti-Avoidance Rules Limiting Interest Deduction? - an Analysis From a Swedish Perspective

Pucar, Dejan LU (2015) HARN60 20151
Department of Business Law
Abstract
The Swedish Government introduced the Swedish interest deduction limitation rules as it was identified that the preferential tax treatment of debt in comparison to equity had been used by Multi-National Enterprises for tax planning purposes. The Swedish rules have, however, been under investigation of the European Commission, which, in a letter of formal notice to the Swedish Government, has stated that the rules are incompatible with the fundamental freedoms of EU law. The purpose of the thesis is, thus, to analyse to what extent Member States can have anti-avoidance rules limiting interest deduction and more specifically whether the Swedish rules are compatible with the fundamental freedoms of EU law. Other international obligations of... (More)
The Swedish Government introduced the Swedish interest deduction limitation rules as it was identified that the preferential tax treatment of debt in comparison to equity had been used by Multi-National Enterprises for tax planning purposes. The Swedish rules have, however, been under investigation of the European Commission, which, in a letter of formal notice to the Swedish Government, has stated that the rules are incompatible with the fundamental freedoms of EU law. The purpose of the thesis is, thus, to analyse to what extent Member States can have anti-avoidance rules limiting interest deduction and more specifically whether the Swedish rules are compatible with the fundamental freedoms of EU law. Other international obligations of Sweden such as State aid, secondary EU law and tax treaties have not been regarded.

Applying the legal dogmatic research method it has been shown that the Swedish interest deduction limitation rules apply to affiliated companies i.e. where a company has substantial influence in another company or if the companies are mainly under the same management. The main rules are that interest expenses are not deductible between affiliated companies or for back-to-back loans, which are used for the acquisition of shares in an affiliated company or a company that will become affiliated after the acquisition. There are some exceptions to this, according to which deduction of interest expenses is allowed if the beneficial owner of the interest income would have been taxed with at least a 10 % tax rate, following the hypothetical test. Deduction of interest expenses, however, can be denied, even though the interest income is taxed with at least 10 %, if the main reason for the debt arrangement is that the affiliated companies are to obtain a substantial tax advantage. Deduction is, further, allowed, even though the interest income is taxed with a tax rate below 10 %, if the transaction is mainly business motivated. There are specific rules for pension funds.

The Swedish interest deduction limitation rules are to be examined with the freedom of establishment as definite influence is a prerequisite for the application of the rules. Even though the Swedish interest deduction limitation rules apply regardless of nationality and residency of the taxpayer are the rules to be considered indirectly discriminatory. The Swedish rules are more likely to apply to cross-border situations than to Swedish wholly internal situations, as the Swedish tax rate is 22 %. It is also, in the preworks, stated that the aim of the rules is to prevent evasion of the Swedish tax base. The Swedish rules cannot be justified by the cohesion of the tax system or the safeguarding of the balanced allocation of taxing rights between Member States due to lack of symmetry but the prevention of tax avoidance can justify the rules since wholly artificial arrangements are restricted. The Swedish rules are, however, not proportionate since the rules have a wider scope of application than to only wholly artificial arrangements, have a presumption of tax avoidance and are not in line with the principle of legal certainty. The Swedish interest deduction limitation rules are, thus, incompatible with the freedom of establishment. (Less)
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author
Pucar, Dejan LU
supervisor
organization
course
HARN60 20151
year
type
H1 - Master's Degree (One Year)
subject
keywords
EU Tax Law, Swedish Tax Law, Anti-Avoidance Rules, Interest Deduction Limitation Rules, Freedom of Establishment
language
English
id
5434453
date added to LUP
2015-06-12 15:56:46
date last changed
2015-06-12 15:56:46
@misc{5434453,
  abstract     = {The Swedish Government introduced the Swedish interest deduction limitation rules as it was identified that the preferential tax treatment of debt in comparison to equity had been used by Multi-National Enterprises for tax planning purposes. The Swedish rules have, however, been under investigation of the European Commission, which, in a letter of formal notice to the Swedish Government, has stated that the rules are incompatible with the fundamental freedoms of EU law. The purpose of the thesis is, thus, to analyse to what extent Member States can have anti-avoidance rules limiting interest deduction and more specifically whether the Swedish rules are compatible with the fundamental freedoms of EU law. Other international obligations of Sweden such as State aid, secondary EU law and tax treaties have not been regarded.

Applying the legal dogmatic research method it has been shown that the Swedish interest deduction limitation rules apply to affiliated companies i.e. where a company has substantial influence in another company or if the companies are mainly under the same management. The main rules are that interest expenses are not deductible between affiliated companies or for back-to-back loans, which are used for the acquisition of shares in an affiliated company or a company that will become affiliated after the acquisition. There are some exceptions to this, according to which deduction of interest expenses is allowed if the beneficial owner of the interest income would have been taxed with at least a 10 % tax rate, following the hypothetical test. Deduction of interest expenses, however, can be denied, even though the interest income is taxed with at least 10 %, if the main reason for the debt arrangement is that the affiliated companies are to obtain a substantial tax advantage. Deduction is, further, allowed, even though the interest income is taxed with a tax rate below 10 %, if the transaction is mainly business motivated. There are specific rules for pension funds.

The Swedish interest deduction limitation rules are to be examined with the freedom of establishment as definite influence is a prerequisite for the application of the rules. Even though the Swedish interest deduction limitation rules apply regardless of nationality and residency of the taxpayer are the rules to be considered indirectly discriminatory. The Swedish rules are more likely to apply to cross-border situations than to Swedish wholly internal situations, as the Swedish tax rate is 22 %. It is also, in the preworks, stated that the aim of the rules is to prevent evasion of the Swedish tax base. The Swedish rules cannot be justified by the cohesion of the tax system or the safeguarding of the balanced allocation of taxing rights between Member States due to lack of symmetry but the prevention of tax avoidance can justify the rules since wholly artificial arrangements are restricted. The Swedish rules are, however, not proportionate since the rules have a wider scope of application than to only wholly artificial arrangements, have a presumption of tax avoidance and are not in line with the principle of legal certainty. The Swedish interest deduction limitation rules are, thus, incompatible with the freedom of establishment.},
  author       = {Pucar, Dejan},
  keyword      = {EU Tax Law,Swedish Tax Law,Anti-Avoidance Rules,Interest Deduction Limitation Rules,Freedom of Establishment},
  language     = {eng},
  note         = {Student Paper},
  title        = {To What Extent Can Member States Have Anti-Avoidance Rules Limiting Interest Deduction? - an Analysis From a Swedish Perspective},
  year         = {2015},
}