Over the past three years, the Swedish krona, along with other minor currencies worldwide, has experienced dramatic fluctuations against major currencies such as the EUR, USD, and GBP. While exchange rate volatility can create opportunities for foreign exchange gains, it also generates significant uncertainty, particularly affecting companies with tight margins that engage in import or export transactions in foreign currency.
To mitigate the impact of exchange rate fluctuations, banks and financial institutions have long offered so-called "foreign exchange derivatives." The Swedish tax treatment of such derivatives has been unclear for some time—particularly regarding whether the costs associated with these derivatives should be classified as interest expenses. The Administrative Court of Appeal in Stockholm has now issued a ruling clarifying the tax treatment of foreign exchange derivatives.
What Is a Foreign Exchange Derivative?
As noted above, a foreign exchange derivative is a financial instrument designed to reduce or completely hedge exchange rate fluctuations for a company. Various types of foreign exchange derivatives exist, but the most common include forward contracts, currency options, currency swaps, and non-deliverable forwards (NDFs).
Which Companies Use Foreign Exchange Derivatives?
In Sweden, small and medium-sized enterprises (SMEs) most commonly use forward contracts, which are agreements between a bank and a company stipulating that the bank will buy or sell a predetermined amount of currency at a specified price on a specified date.
Larger corporations, however, are more likely to utilize currency swaps. In essence, a swap allows a company to exchange currencies, often to facilitate interest payments on loans denominated in a more stable currency. For example, a treasury entity within a corporate group may wish to extend a loan in SEK to a subsidiary, but the subsidiary may, for various reasons, prefer exposure to USD, paying a premium to the bank in return.
How Are Foreign Exchange Derivatives Taxed in Sweden?
In a case decided on January 20, 2025, by the Administrative Court of Appeal in Stockholm, the issue at hand was whether an unrealized positive value change in a foreign exchange derivative should be recognized as taxable income.
Both the company and the Swedish Tax Agency (Skatteverket) agreed that the derivative should be classified as a capital asset for tax purposes. The court began its reasoning by noting that foreign exchange gains on loans are subject to ongoing taxation in Sweden.
Regarding the taxation of foreign exchange derivatives, the Administrative Court of Appeal in Stockholm ruled that there was no legal basis to tax unrealized value changes in such instruments. The Swedish Tax Agency’s position was thus entirely rejected.
It is likely that this ruling also implies that unrealized negative value changes in foreign exchange derivatives will not be tax-deductible.
What Are the Practical Implications of the Ruling for Swedish Companies Holding Foreign Exchange Derivatives?
Depending on a Swedish company’s size, unrealized value changes in foreign exchange derivatives are accounted for differently. For smaller companies applying the K2 accounting framework, unrealized losses are generally recognized as expenses, while unrealized gains are only recorded upon realization. For larger companies applying the K3 framework, both unrealized gains and losses must be continuously recognized in the accounts.
In light of the Administrative Court of Appeal’s ruling, it is now evident that tax adjustments may be necessary in the corporate income tax return relative to accounting treatment.
Moreover, companies that have previously recorded unrealized positive value changes in foreign exchange derivatives and consequently paid tax on such unrealized gains may now seek reassessment and reclaim the erroneously levied tax. Note that such reassessment requests can only be made for the past six tax years.
Does your company utilize foreign exchange derivatives and need guidance on their Swedish tax treatment? Do not hesitate to contact us at nomadtax.
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