How to optimize tax savings from fixed asset investments

A combination of new incentives and complex rules means that enhancing cash flow through the proper treatment of fixed asset expenditure is a key priority in 2021. If identified correctly, 30-35% of the cost of typical capital projects is eligible for accelerated tax relief.

Managing corporate income tax

Failure to make use of beneficial rules related to capital expenditure means that many companies are left with higher than necessary corporate income tax bills just as Covid-19 is making its effects felt on the economy. Combined with the recently introduced limitations on the deductibility of negative net interest expenses, this has led to a situation where companies are being faced with increasing effective tax rates while cash, required to maintain operations in the face of reduced sales or rental income, is in short supply.

Legislation provides for the accelerated depreciation of the acquisition costs of particular groups of assets (e.g. machinery, building equipment, land equipment etc.) but optimization of this area is often overlooked. An expert analysis can allow for a significant proportion of capital project costs to be written off at an accelerated rate or immediately deducted, providing increased tax depreciation which can be used to offset profits and reduce corporate income tax due without resorting to group contributions and without having a negative impact on the EBITDA basis for calculating interest deductions.

Incentives

Alongside the established legislation on tax depreciation, the Swedish government has recently announced a new incentive in the form of a tax credit worth 3.9% of the acquisition cost of machinery and equipment purchased in 2021 (see more information in Swedish here). In practice this means that between 1% and 2.5% of the cost of typical capital projects undertaken in 2021 could be deducted from tax payable, on top of accelerated depreciation deductions for the same costs.  

As well as tax incentives, grant funding for capital projects is also available, particularly for projects with a sustainability focus.

Examples

Fit out/refurbishment of an existing office – for every SEK 1 000 000 spent on the project, tax depreciation over the first 5 years could be increased by SEK 400 000 – 550 000 (with a tax saving of SEK 85 000 – 110 000) plus an additional tax credit of SEK 20 000 – 25 000.

New build construction of a logistics center – for every SEK 1 000 000 spent on the project, tax depreciation over the first 5 years could be increased by SEK 220 000 – 280 000 (with a tax saving of SEK 45 000 – 60 000) plus an additional tax credit of SEK 10 000 – 14 000.

Note: the above examples are provided for illustration purposes only, actual tax savings realized will depend on the specification of the project and the tax circumstances of the company. The approaches discussed are relevant to fixed asset projects across all sectors.

Summary

Optimization of the tax treatment of fixed asset expenditure can have a significant impact on effective tax rates and cash flow. Careful consideration and expert knowledge are required to make the best use of these benefits in the face of changing legislation and economic pressures.

To find out more about how fixed asset optimization can help your business, please contact a member of our team.

Marcel Sikkema, Joel Gilbey and Henrik Fråhn

 

Contact
Marcel Sikkema
+46 73 340 77 82

 

Contact
Joel Gilbey
+46 73 245 19 11

 

Contact
Henrik Fråhn
+46 73 374 89 28