New Swedish Corporate Income Tax Rules affect Q2 2018 Accounts

The Swedish Parliament has passed a law on major changes to the Swedish regulations on corporate income taxation. The law will apply from 1 January 2019, but some of the new rules may affect the tax accounting already in Q2 2018.

1. Tax accounting effects of new rules on corporate income tax

On 14 June 2018, The Swedish Parliament passed a law on major changes to the Swedish regulations on corporate income taxation. The law will apply from 1 January 2019. However, some of the changes affect the tax accounting earlier than this based on the law being enacted.

The two changes that are most relevant for tax accounting are a change of the corporate income tax rate in two steps, and rules limiting the possibility to deduct interest expenses. The change in tax rate affects the valuation of deferred tax assets and deferred tax liabilities, whilst a limitation on interest deductions can have indirect effects on companies’ possibility to account for deferred tax assets.

2. Change in corporate income tax rate

The new law provides a decrease of the corporate income tax rate in two steps from 22 percent to 21.4 percent from 1 January 2019 and to 20.6 percent from 1 January 2021.

Deferred tax assets and deferred tax liabilities have to be valued based on the tax rate that will apply when the underlying temporary difference reverses or when unused tax losses or credits are utilized. This means that deferred taxes should be revalued as soon as future tax rate changes are substantively enacted – even if this happens within an interim period and even before the new rate actually applies. Revaluation of deferred tax assets that were originally booked through profit and loss will result in higher tax expense and a higher effective tax rate whereas revaluation of deferred tax liabilities that were originally booked through profit and loss will result in tax income and a lower effective tax rate. The effective tax rate will be affected in the same period in which the law was enacted, i.e. June 2018. The revaluation of deferred tax assets and liabilities that were originally accounted for through other comprehensive income or through equity, should however be accounted for in the same way as the original asset or liability (backwards tracing).

The result of the above described accounting is that the effect from the revaluation will be accounted for in the period in which the new regulation is passed. Another possible alternative is to incorporate the revaluation effects when calculating the estimate annual effective tax rate in line with IAS34 30 c. In case the profit before tax is spread evenly over the whole year this will spread the effect over the year, and allocate approximately half of the revaluation effect to Q2.

In order to decide which of the future tax rates has to be used, companies should create an overview of when each of their temporary difference will revert as well as when tax losses carried forward and tax credits will be utilized. Please also note that some items, such as tax allocation reserves, will still be reversed with a tax rate of 22 percent due to specific regulations in the new law.

3. Limitations on interest deduction

The new limitations on interest deduction allow companies to deduct net interest expenses of up to 30 percent of EBITDA. However, this limitation only applies to net interest expenses exceeding five million SEK. The proposed limitation is combined with detailed definitions of what should be deemed as interest incomes and expenses and how the income measure EBITDA should be calculated for this specific purpose.

The limitation will affect the current tax calculation for fiscal years starting on or after 1 January 2019. Companies that need to project future taxable profits in order to determine the amount of deferred tax assets that could be capitalized, should however incorporate the future effects of the new limitations in their projections already in Q2 2018.

A simplified example:

A company has deductible temporary differences, unused tax losses and tax credits of 100 MSEK. The company currently projects a yearly profit of 12 MSEK for the five upcoming years. Based on this, the company has accounted for deferred tax assets of 60 MSEK (12 MSEK x 5). The company now projects a yearly add back of non-deductible interest expenses of 6 MSEK based on its current financing structure. This projects a yearly taxable profit of 18 MSEK (12 MSEK + 6 MSEK) for the five upcoming years. Based on this, the company should now account for a deferred tax asset of 90 MSEK (18 MSEK x 5).

Another aspect of the new law, is that Sweden will get a new kind of carry forward amount – unused net interest expenses. Unused net interest expenses can be carried forward up to six years. Companies will have to evaluate the possibility to utilize their unused net interest expenses in future periods in order to determine if they should capitalize deferred tax assets on those.

4. Time to act

The above described forecasts and calculations can be quite complex and it is important to start the considerations and calculations now.

For additional information with respect to this article, please contact one of the writers.

Daniel King, Eva Stauske and Malin Axelsson

 

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Contact
Daniel King
+46 73 040 43 72

 

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Eva Stauske
+46 73 303 97 57

 

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Malin Axelsson
+46 72 583 80 73