The Swedish government released a proposal to transpose the 2017 EU directive on hybrid mismatches without harming the cross border investment due to the excessive administrative burden.
Following the EU directive and OECD Base Erosion and Profit Shifting (BEPS) project, the proposal aims to prevent the profit shifting created by hybrid entities or instruments and branch or residency mismatches by neutralizing double deduction and deduction-without-inclusion mismatches.
The proposal suggests that the current Income Tax Law (ITL) provisions, which became effective from 1 January 2019, are extended to cover situations involving hybrid mismatches and include types of expenses other than interest expenses. Furthermore, the scope of the legislation would cover not only arrangements between related parties but also arrangements made for the purpose of obtaining a tax advantage.
Concerning the related parties definition, the proposal clarifies that to the extent the mismatches transaction does not partially or completely covered by the existing rule (including entity classification and branch mismatches), it would be subject to 50 percent common ownership threshold to be considered as associated enterprise. Nevertheless, the mismatches transaction falls within the existing rule, the proposals would not amend the 25 percent common ownership threshold to define the entity as related parties.
In order to comply with the 2017 EU directive, the proposals would explicitly void specific provisions of Sweden’s bilateral treaties with Bulgaria, Cyprus, and Greece by asserting taxing rights over income of Swedish-resident companies conducting business through a permanent establishment in the contracting state if the contracting state does not recognize the PE. As such, income would not be untaxed under treaties using the exemption method. Furthermore, the proposals would also establish a credit system to cover situations involving a deduction that is matched by an inclusion, but which is taxed at a low rate.
To prevent the excessive administrative burden, the proposal would only be affecting taxpayers that use abusive tax planning structures. As another measure, the memorandum also recommends an approach that maximizes both uniformity with international standards and congruence with existing Swedish law. The memorandum omits from its proposals the primary or secondary rule when existing law already neutralizes the mismatch.
Source: Swedish Government
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