EU courtroom rejects Swedish guidelines limiting deductions for cross-border curiosity funds – MNE tax

By Emiliha Ferrão, Transfer Pricing Specialist at Thorning Koponen Consulting in Stockholm, Sweden

In a judgment published on January 20, the European Court of Justice found that the Swedish rules on restrictions on interest deduction violated EU law and the freedom of establishment.

The judgment concerned a Swedish company that had been denied a deduction for interest payments related to an intra-group loan by its French affiliate due to the Swedish rules on interest limitation, which were in effect until 2018.

Swedish tax law could allow a deduction for interest payments if the corresponding interest income had been taxed at least 10% in the Member State in which the legal recipient of the income is tax resident. However, no interest deduction is allowed if the primary reason for the underlying intra-group loan was to obtain a tax break for the group.

In the years under review, corporate income tax in France was 34.43%. The French affiliate was making a loss and the interest income paid by the Swedish company could be offset against the losses in France for tax purposes.

The Swedish tax authorities argued that the main reason for the underlying intercompany loan was to obtain a tax advantage and therefore refused to allow a deduction for the interest payments to the French company.

The European Court of Justice found that the Swedish rules on interest deduction restrictions contradicted the freedom of establishment under European law, as interest deduction would have been permitted under Swedish tax rules on group contributions if the French company had been resident for tax purposes in Sweden.

Therefore, it was assumed that the Swedish rules on interest deduction restrictions limit the freedom of establishment of companies.

Furthermore, the Swedish rules could not be justified by a reference to the prevention of tax avoidance or abuse or the balance in the division of tax rights between Member States in the EU.


The ruling is a positive development in the Swedish legal tax environment as the rules under review tend to affect cross-border intra-interest payments that are determined according to market conditions, ie the arm’s length principle.

It remains to be seen whether Sweden’s new rules on interest deduction restrictions will be examined against the judgment of the EU Court of Justice from the 2019 financial year.

In the meantime, companies may be able to appeal previous decisions on denied interest payments based on the Swedish rules on interest deduction restrictions for the years 2015-2018.

Emiliha Ferrão is a transfer pricing professional with experience in tax and transfer pricing work at PwC and EY. Emiliha has worked with small and medium-sized businesses as well as larger multinational companies worldwide.

She has led projects ranging from the implementation of operational transfer pricing routines and MDR processes (Mandatory Disclosure Regime) to restructuring and tax audits, and has many years of experience in working with stakeholders at all levels.

Thorning Koponen Consulting is based in Sweden and focuses on finding pragmatic actionable solutions that are compliant with local tax regulations and international guidelines. We offer interim solutions, transfer pricing advice and software implementation services.

Emiliha Ferrão

Emiliha Ferrão