Increase the amount for the simplification rule
Since 2019, there has been a restriction on the right to deduct interest expenses for legal entities. The right to deduct is only granted up to 30 percent of EBITA, i.e. the company's earnings before interest, depreciation deductions and provisions to/reversals of tax allocation funds. At the same time, a simplification rule was introduced, meaning that interest deductions may be made up to an amount of SEK 5 million. In addition, the tax rate was reduced from 22 percent to 21,4 and in 2021 it was reduced to 20,6 percent.
The change was introduced without much debate because market interest rates at the time were very low, 1-1,5 percent, and only companies with debts exceeding SEK 350 to 500 million were affected. Now that market interest rates are approaching 5 percent, it means that companies with debts exceeding SEK 100 million will face significantly increased taxes.
The deduction restriction will cost the company an additional 20 percent on the margin, meaning that every percentage point that the interest rate rises will in reality cost the company 1,2 percentage points. The restriction results in a significantly higher tax on risk-taking!
A company with an EBITA result of SEK 16,5 million and an interest expense of SEK 10 million only gets a full deduction for SEK 5 million and must therefore pay SEK 1 million in tax on a result that does not actually exist. It is therefore not only the increased interest rates that worsen the result and liquidity, but also the drastically increased tax.
We can influence
Initially, the Social Democratic government proposed that the simplification rule would apply up to SEK 1 million, but after pressure this was increased to SEK 5 million. However, EU rules allow an amount for the simplification rule of as much as EUR 3 million, i.e. almost SEK 35 million with the current alarmingly weak exchange rate.
Here, the Swedish parliament can quickly raise the limit to a level to avoid a sharp tax increase for medium-sized companies and thereby support the many real estate companies that are now suffering from high interest costs. It is typical for Sweden that we should always choose the most extreme interpretations of EU directives.
New tax rules with deductions for equity are being prepared in the EU and hopefully the new rules will create a better balance between the gross cost of equity and debt. While waiting for these new rules, the amount of the simplification rule should be increased drastically so as not to further exacerbate the crisis in the real estate companies.
Facilitate for the industry
It was not until 2023 that the increased interest rates took effect, and it is with the declarations this year that the drastically increased taxes will become a reality. Many medium-sized real estate companies will likely have problems at the end of the year when taxes are due.
To make things easier for the industry in the coming years, it is important to increase the simplification amount to SEK 30 million. The modest tax reduction from 22 percent to 20,6 percent does not nearly compensate for the effects of the deduction limitation.
The limitation rules also make it more difficult to utilize carried-over deficits, which could then be wasted.
As in so many other cases, far-sighted entrepreneurs can ward off the worst consequences of new tax rules. For example, companies and groups can be divided into several so that interest deductions can be fully utilized. However, this costs many expensive consulting hours, increases administration costs, eliminates the right to group contributions and equalization measures between companies, and of course inhibits growth and resource-creating creativity.
Day Magnusson
