Sweden Tax: New rules on cross-border group contributions introduced

On 5 May 2010, the Swedish Parliament enacted new rules on cross-border group contributions intending to make the Swedish legislation EU compliant. The rules, which under certain limited circumstances will allow a Swedish parent company to deduct a final loss in a wholly and directly owned foreign subsidiary within the European Economic Area (EEA), were proposed in response to a March 2009 decision by the Swedish Supreme Administrative Court concluding that the group contribution rules were in conflict with EU law.

The group contribution rules allow Swedish companies to offset taxable profits within a Swedish group provided certain conditions are satisfied. Group contributions currently are deductible for the paying company and taxable for the receiving company if:
- The parent company owns more than 90% of the subsidiary for the entire income year (or a common parent company owns more than 90% of the companies);
- Neither the paying nor the receiving company is an investment company;
- The group contribution is effectuated by a real transfer of wealth; and
- The payor and the recipient fully disclose the contribution in their Swedish income tax returns.

The new rules mean that a Swedish parent company may deduct a loss of a wholly owned foreign subsidiary located within the EEA provided the subsidiary has been liquidated and there is a final loss in the subsidiary. It should be noted that the deduction for this loss may not lead to a deficit in the Swedish part of the group. The deduction is subject to further conditions designed to ensure that the loss is genuine and irreversible (i.e. that the subsidiary has exhausted all possibilities to use the losses). With certain limitations, an amount not exceeding the loss of the subsidiary at the end of the last full fiscal year prior to, or at the conclusion of, the liquidation may be deducted. Further, the Swedish company claiming the deduction may only use losses incurred during the time (entire fiscal years) the foreign subsidiary was directly wholly owned by the parent company.

The loss must be computed under both the tax rules in the country where the foreign subsidiary is resident and the Swedish tax rules (as if the subsidiary had been a Swedish limited liability company with equivalent Swedish income). A deduction may be taken for the lower of the two computations. Contrary to what is required for group contributions between two companies subject to taxation in Sweden, there will be no need for a real value transfer in connection with cross-border group contributions.

The rules on cross-border group contributions will supplement the existing rules on non-cross-border group contributions, i.e. group contributions to and from companies subject to tax in Sweden. The rules on non-cross-border group contributions will remain unchanged.

The new rules will enter into force on 1 July 2010 and be applicable in relation to losses of foreign subsidiaries liquidated after 30 June 2010.