Thin Capitalisation : A comparison of the application of article 9.1of the OECD model tax convention and the Swedish adjustment rule to thin capitalisation

Sammanfattning: This thesis answers the question “How does the application of the Swedish adjustment rule correspond to the OECD point of view regarding intragroup loans to thinly capitalised companies?” The question is answered by using the traditional legal method and by examining the way the adjustment rule is applied by the Supreme Administrative Court, the Swedish approach when using the arm’s length principle in Swedish law is then compared to the approach recommended by the OECD. From a tax point of view intragroup prices on commodities and services are of vital importance for multinational enterprises, since these prices in the end affects the total corporate taxation. Also the way of financing a company can have tax implications since it could be an advantage for an MNE to arrange financing of companies within the group through loans rather than contribution of equity capital. A company with a disproportionate debt to equity ratio is considered thinly capitalised and since interest payments are considered deductible expenses, which dividends are not, it provides a way to transfer untaxed profits within a group. This may be an incentive for MNEs to intentionally thinly capitalise companies by providing them with capital through loans instead of equity contributions. The Swedish provision regulating transfer pricing between associated enterprises is the adjustment rule which expresses the arm’s length principle. The purpose of the rule is to adjust erroneous pricing between associated enterprises and it has four requisites that have to be fulfilled in order to be applicable. In the thesis it is concluded that nothing in the preambles to the adjustment rule points at the provision being applicable to thin capitalisation, on the contrary they indicate that it should have a narrow application. Through case law it has been established that the adjustment rule is not applicable to thin capitalisation situations in the sense that it can not be used to reclassify a loan into equity contribution. The provision is, in such a situation, only applicable to adjust interest rates that deviate from rates on the open market. The arm’s length principle expressed in article 9.1 of the OECD Model Tax Convention however seems to have a broader application than the adjustment rule. It is stated in the commentary to the article that it may be applied to prima facie loans, i.e. it can reclassify a loan into equity contribution if the surrounding circumstances points at it being the true nature of the transaction. The conclusions drawn when comparing the reasoning of the Supreme Administrative Court with the OECD regarding the application of the arm’s length principle, is that the way the OECD reason regarding the true nature of a transaction is based on the same idea as the reasoning of the Swedish court. The Swedish Supreme Court however uses this type of reasoning when applying the substance over form principle and not when applying the adjustment rule. In other words, the difference is that the adjustment rule is not acknowledged the same scope of application as article 9.1. Regarding the need to legislate against thin capitalisation in Sweden it is the authors’ opinion that since no examination of the problem has been performed, it is necessary to examine whether thin capitalisation in reality constitutes a problem for the Swedish revenue. Not until it is established if a problem exists should there be a discussion regarding the construction of such a provision.