On November 6, 2018, Sweden’s Parliament issued the Tax Committee’s report on its endorsement of the Government’s proposals to amend Swedish controlled foreign company (CFC) rules in the Income Tax Act (No. 1229 of 1999) to satisfy the requirements in EU Directive 2016/1164 (ATAD 1). See BEPS Action 3.
According to Article 7 of ATAD 1, the taxpayer’s EU member state must treat an entity or permanent establishment (PE), whose profits are not subject to tax or are exempt from tax in that member state, as a CFC where the following conditions are met:
- In the case of an entity, the taxpayer by itself, or together with its associated enterprises, holds a direct or indirect participation of more than 50 percent of the voting rights, or owns directly or indirectly more than 50 percent of capital, or is entitled to receive more than 50 percent of the profits of that entity.
- The actual corporate tax paid by the entity or PE on its profits is lower than the difference between the corporate tax that would have been charged under the applicable corporate tax system in the taxpayer’s member state and the actual corporate tax paid.
Where an entity or PE is treated as a CFC, the taxpayer’s member state must include the following in the tax base:
- The undistributed income of the entity or PE, which is derived from the following categories:
- Interest or any other income generated by financial assets.
- Royalties or any other income generated from intellectual property.
- Dividends and income from the disposal of shares.
- Income from financial leasing.
- Income from insurance, banking and other financial activities.
- Income from invoicing companies that earn sales and services income from goods and services purchased from and sold to associated enterprises, and add no or little economic value.
Under Article 8 of ATAD 1, where the member state includes the above income in the tax base, the income must be calculated in accordance with the rules of the corporate tax law of the member state, where the taxpayer is tax resident or situated. The entity’s or PE’s losses cannot be included in the tax base, but may be carried forward and taken into account in subsequent tax periods.
The new provisions are proposed to enter into force on January 1, 2019, and will first apply to taxable years beginning after December 31, 2018.
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