Diligentia was the parent company of a Group active in real estate. After a take-over of Diligentia by another Group, Skandia Liv, external loans in Diligentia were terminated and replaced with intra-group loans from the new parent company, Skandia Liv.
The new loans had an interest rate of 9,5 percent compared to the interest rates before the take over where the average rate was 4,5 percent (STIBOR added with 0,4 percent). Skandia Liv was a life insurance company (tax free under Swedish law)
The tax authorities stated that the interest rate level exceeded a marked interest rate level and that the excess rate constituted deemed dividends.
The Administrative Court established that an arm‟s length rate can be determined by looking at a wide range of interest rate levels since an interest rate is determined by a number of elements such as the borrower‟s credit worthiness, collateral, term to maturity etc.
The court set the interest at 6,5 percent. The Court claimed that the loans should be compared to loans with collateral, due to the ownership structure.
The Supreme Administrative Court stated that, when pricing a loan it was vital to be aware of the risk that a borrower will not be able to carry out the payments and the possible need for a security. When a parent company is granting a loan to its subsidiary different conditions apply.
While a parent company exercises control over its subsidiary, an external lender only has limited insight. The external lender can also be unsure of the intentions of the parent company, i.e. the will to support the subsidiary financially in case of default.
The Court claimed that loans from parent companies to subsidiaries have characteristics that influence the credit risk, hence the interest rate. These characteristics are absence when lenders and borrowers are independent parties. With the same conditions in general, the interest rate could not, without further, be settled to what would have been considered a market price if the lender had been external.
Finally, the Court stated that the credit risk in this case was lower than if the loan agreements would have been concluded between independent parties. Based on the information submitted in the proceedings concerning the interest rate and other conditions, the Court did not see a reason why Diligentia should deduct a sum higher than 6,5 percent.