The Swedish Supreme Administrative Court (Högsta förvaltningsdomstolen) submitted a request for a preliminary ruling to the European Court of Justice on the compatibility of an interest limitation rule in the Swedish Law on income tax with the freedom of establishment provided for in Article 49 of the Treaty on the Functioning of the European Union.
“5 Under Paragraph 10b of Chapter 24 of the Swedish Law on income tax, a company linked in a group of associated companies may not deduct interest expenses in relation to a debt owed to an associated company, unless otherwise provided for under Paragraph 10d or Paragraph 10e of that chapter.
6 The first subparagraph of Paragraph 10d of Chapter 24 of the Law on income tax provides that interest expenses relating to the debts referred to in Paragraph 10b of that chapter are deductible if the corresponding income would have been taxed at a nominal rate of at least 10% under the legislation of the State in which the company in the group of associated companies actually entitled to the income is established, if that company were to have only that income (‘the 10% rule’).
7 The third subparagraph of Paragraph 10d of Chapter 24 of the Law on income tax provides that, if the main reason for incurring the debt is that the group of associated companies would receive a substantial tax benefit, then no deduction for interest expenses may be made (‘the exception’).
8 The first subparagraph of Paragraph 10e of that chapter provides that, even if the condition of the 10% rule is not met, interest expenses relating to the debts referred to in Paragraph 10b of that chapter are deductible if the underlying debt is justified primarily on commercial grounds. However, that holds true only if the company in the group of associated companies that is actually entitled to the income corresponding to the interest expenses is established in a State within the European Economic Area (EEA) or in a State with which the Kingdom of Sweden has entered into taxation agreements.”
Judgment of the Court
The Court of Justice held that the Swedish tax system was discriminatory.
“Article 49 TFEU must be interpreted as precluding national legislation, such as that at issue in the main proceedings, which provides that a company established in one Member State is not permitted to deduct interest payments made to a company belonging to the same group, established in another Member State, on the ground that the principal reason for the debt linking them appears to be the obtaining of a substantial tax benefit, whereas such a tax benefit would not have been deemed to exist if both companies had been established in the first Member State, as in that situation they would have been covered by the provisions on intra-group financial transfers.”
Sweden EUCJ Lexel C-484-19 Jan 2021