In January 2003, a Swedish company, Nobel Biocare Holding AB, entered into three loan agreements with its Swiss parent company. The loans had 15, 25 and 30 maturity respectively, with terms of amortization and with a variable interest rate corresponding to Stibor plus an interest rate margin of 1.75 percent points for one of the loans and 1.5 percent points for the other two loans. The same day the parent company transfered the loans to a sister company domiciled in the Netherlands Antilles.
In June 2008 new loan agreements was signed. The new agreements lacked maturity and amortization and interest rates were stated in accordance with the Group’s monthly fixed interest rates. Amortization continued to take place in accordance with the provisions of the 2003 agreement, and the only actual change in relation to those agreements consisted in raising the interest rates by 2.5 percent points. These loans were transferred to a Swiss sister company.
The Swedish Tax administration denied tax deductions corresponding to the difference between the interest rates in 2003 and 2008 respectively, with the support of the arm’s length rule in Chapter 14 Section 19 of the Income Tax Act (1999: 1229).
The question before the HFD Court was whether the correction rule could be applied when a contract with a certain condition was replaced by an agreement with worse conditions – Were an audit according to the correction rule limited to referring only to the interest rate terms of the 2008 agreement or were there any reason to take into account the existence and content of the agreements that had previously been concluded between the parties?
Judgment
The Court stated that a prerequisite for applying the correction rule is that the company’s earnings have been lowered as a result of terms being agreed which differ from what would have been agreed between independent parties. It is thus the effect of the earnings that must be assessed and not how a single income or expense item has been affected.
According to the Court, it was not only the new interest rate in the 2008 agreement that should be used as the basis for the audit, but all af the terms agreed by the parties. Of particular importance was the fact that the company accepted an increased interest rate without compensation, even though the 2003 agreement did not contain any such obligation for the company. The Court considered that an independent party would not have acted in that way.
The Court concluded that the correction rule could be applied when a contract with a certain condition was replaced by an agreement with worse conditions. Such an interpretation of the correction rule was considered compatible with the OECD Guidelines.