Sweden: Revising an agreement’s conditions to arm’s length terms

Sweden: Agreement’s conditions to arm’s length terms

In a June 2016 judgment, Sweden’s Supreme Administrative Court concluded that provisions of Sweden’s income tax law apply when an agreement with certain conditions is replaced with an agreement with less beneficial conditions, although both agreements are considered to be at arm´s length. This interpretation, according to the court, is consistent with the OECD guidelines on transfer pricing.

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The Swedish tax agency on 1 July 2016 published its comments on the decision, indicating that the judgment is generally consistent with the tax authorities’ position. Additionally, the tax agency stated that it is possible for companies to revise agreements concluded on non-arm's length terms to what would have been arm's length terms when the agreement was concluded—without requiring historic adjustments. 


In 2003, three loan agreements were signed between the taxpayer company (the borrower) and its parent company. The receivables were immediately transferred to a sister company of the borrower, located in the Netherlands. The agreements contained terms regarding the maturity (ranging from 15 years to 30 years), amortization, and interest, but no conditions that enabled the lender to adjust the interest rate during the term of the agreement. In 2008, during the term of all three agreements, the loan agreements were replaced, with the parties agreeing to an increased interest rate, without any other compensation being offered to the borrower. Seen by itself, the new interest rate was considered to be at arm's length. The new receivables were then transferred to another sister company, this one located in Switzerland.

The Swedish tax agency denied the borrower a deduction for the interest costs on the basis such costs exceeded the interest payments that would have been due on the loan agreements entered into in 2003, and in finding that an independent party in a similar contractual relationship would be reluctant to enter in to agreements with less beneficial terms and conditions, without being offered any form of compensation.

In a lower court action, the borrower asserted that the interest rate in the original agreements (2003) were not at arm’s length, thus implying that there was a reason for the borrower to agree to an adjustment of the loan agreements. The tax authorities agreed that terms and condition regarding an interest rate that is not at arm’s length can be adjusted, without activating section 14 paragraph 19 of the income tax law, but that the borrower has the burden of proof in such situations. The Administrative Court of Appeal concluded that the borrower had failed to show that the interest rate agreed on in the 2003 agreements was not at arm’s length. 

The Supreme Administrative Court granted leave for an appeal to consider whether the income tax provision (section 14 paragraph 19) could be applied when an agreement with certain contractual terms and conditions is replaced by another agreement not having such beneficial terms and conditions, although the new terms and conditions are considered to be at arm's length. The court held that not only is the new interest rate at arm's length, but so were all of the terms and conditions that the parties agreed upon when entering the agreements. Thus, it was concluded that the tax law provision (section 14 paragraph 19) can be applied on terms and conditions that themselves are at arm's length, if they in relation to what previously had been agreed to in agreements that have yet not expired. 


Read a July 2016 report prepared by the KPMG member firm in Sweden: Swedish judgment on the arm's length principle and the Swedish Tax Agency’s comment

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