Swedish Bank Merger Rules Aim to Limit Risk of Tax Imbalance

A plan by Nordea Bank AB to merge with subsidiaries in Denmark, Finland and Norway has prompted Sweden to revise its laws to minimize the risk of a tax imbalance when a foreign company’s shares and other financial instruments are merged with those of domestic company.

Effective Jan. 1, the measure revises the way taxation of financial companies is calculated following cross-border mergers and demergers.

The merger involving Nordea Bank AB was completed Jan 1. The bank previously claimed its plans to merge with its wholly owned foreign subsidiaries were hampered by the differing ways the value of their assets and liabilities could be calculated by Swedish and foreign tax authorities. This, the company claimed, discouraged commercially motivated cross-border restructures and was incompatible with anti-double taxation measures contained in the European Union’s Merger Directive (2009/133/EC).

On Jan. 15, 2016, the bank submitted a request to the Finance Ministry to examine the former legislation’s compatibility with the Merger Directive. The ministry subsequently prepared a legal proposal aimed at ensuring that commercially motivated cross-border mergers and demergers aren’t subject to negative tax consequences.

Fair Value

Under the new legislation (2016/17:7), the Swedish Tax Authority’s valuation of the assets in question will correspond to the assets’ tax value in the foreign country. The taxation of bonds, shares and other financial instruments that are acquired by Swedish financial companies during mergers will be affected.

The new rules state that financial instruments classified as current assets that become subject to tax through a merger or a demerger should be fair valued. Previously, current assets were valued under the so-called “lowest value principle,” meaning that they could either be valued at their purchase value or their fair value, depending on which was the lowest.

The law also reintroduces a requirement that securities must lose their value or be deemed sold when the company that has issued them is dissolved through a merger or fusion. Additional liquidity requirements have also been implemented, related specifically to Nordea Bank.

In Breach of Merger Directive

“The previous rules, which were changed on January 1, were considered to be in breach of the intention of the EÚs merger directive,” Nordea said in Jan. 5 statement provided to Bloomberg BNA. “They would have led to double taxation of assets in stock transferred to Sweden in a merger, in this case primarily financial instruments and loan stocks.”

In a Jan. 5 statement provided to Bloomberg BNA, BDO tax director Asa Edesten said the changes would have little impact outside the financial sector, and were implemented with the Nordea merger in mind.

“The new regulations are rather narrow in scope and seem to be designed primarily to solve the specific problem of international mergers of banks’ subsidiaries” she told Bloomberg BNA.

“They do cover all European Economic Area (EEA) cross border mergers, but we do not foresee any larger tax planning impact.”

“Having said that, this is something which needs to be taken into account when considering cross border merging within the EEA,” she said. “It does provide a streamlined and convenient way to limit double taxation in this case.”

Transfer Pricing

In a Jan. 6 statement, Baker McKenzie attorney Linnea Back told Bloomberg BNA the new rules won’t have an impact on companies’ transfer pricing practices.

“The merger itself may affect transfer pricing policies, but such policies are not affected by the legislative proposal,” she said. “The new legislation is expected to make mergers between financial companies more attractive in the future but will not have any effect on non-financial companies.”

The approved bill also allowed for the introduction of a new optional tonnage tax for Sweden’s shipping industry. The new system implies that the taxation of qualifying shipping companies is set at a flat rate based on the volume of the company’s vessels.

Shipping companies aren’t obliged to be covered by the new rate and can opt to remain subject to conventional taxation. The tonnage tax will apply for fiscal years starting after Dec. 31, 2016. Companies seeking to be subject to the tax should apply for advance approval.