The Swedish government said Friday, June 8, that it will close a tax loophole that allowed private equity firms and other companies to book interest payments on internal loans as expenses.
The decision to introduce new legislation follows a tax office investigations into the creation of entities in low tax regions that were used to loan money at high interest rates to sister companies in Sweden. The Swedish units then booked the loan payments as a cost while the earnings attributed to the creditor attracted little tax.
"The proposal will efficiently limit aggressive tax schemes," Sweden's Finance Minister Anders Borg told reporters at a news conference. "We are closing the possibility to use tax havens."
The new regulations are not specifically aimed at private equity firms but follow a media campaign that highlighted the use of the tax loophole by PE shops that were making some of their earnings from contracts with the government health service.
"We have seen [in the health sector] that private equity firms have had very aggressive schemes and that they have accounted for a large share of these schemes," said Borg.
Sweden's center-right government believes that the new measures will boost annual tax revenues by as much as 6.3 billion Swedish kronor ($880 million) from January 2013, when it is expected to come into force. The government said it would use the new tax revenue to finance a reduction in the corporate tax rate.
Sweden's business lobby, the Confederation of Swedish Enterprise, has criticized the change of law. It claims the new rules will introduce uncertainty into the Swedish tax code as the "right to interest expense deduction for all borrowing within a single corporate construction will be entirely dependent on a subjective assessment of the commercial basis for that borrowing."
Sweden is home to some of Europe's largest private equity shops, including Stockholm-based EQT Partners AB and Nordic Capital.