Repayment of Tax Deferrals Granted During the COVID-19 Pandemic – What Applies?

As a practitioner in insolvency law, one can note that many companies now seeking assistance in an insolvency situation have utilized the tax deferral option introduced early during the COVID-19 pandemic. A large portion of the total deferral amount of SEK 56 billion has been repaid, but the government estimates that approximately 13,000 companies will require an installment plan of an additional 36 months to repay approximately SEK 13.5 billion, which the companies are unable to pay within the previously granted deferrals of 24 months. If the company is unable to comply with the installment plan, corporate restructuring may be a possible way to reduce the debt burden.

Between March 2020 and February 2022, restrictions were in place to prevent the spread of the coronavirus. Many expected these conditions to result in a significant increase in the number of bankruptcies. However, as a result of the various support measures introduced, the number of bankruptcies decreased during 2020, 2021, and the first quarter of 2022, compared to the immediately preceding years. Particularly during 2020, however, certain industries experienced an increase in bankruptcies, primarily companies operating in the hotel and restaurant sector, the cultural sector, and retail clothing.

In March 2020, a new tax deferral option was introduced to mitigate temporary liquidity problems that may arise for fundamentally sound and viable companies due to the pandemic and measures to limit the spread of infection. The maximum deferral period was initially one year from the decision on deferral, which was extended to two years in February 2021.

At the beginning of 2022, tax deferrals of approximately SEK 56 billion distributed among approximately 53,000 companies had been granted. Approximately 40% of the total deferral amount pertained to small businesses, which constitute approximately 95% of the total number of companies with tax deferrals. The companies with tax deferrals are primarily in the trade, hotel and restaurant, and construction sectors.

This can be compared to the total deferral amount of approximately SEK 6.8 billion when a similar deferral option was available from March 2009 to January 2011 in connection with the financial crisis.

Given that a large number of tax deferrals expire during the spring of 2022, beginning at the turn of March/April 2022, an option was introduced at the beginning of 2022 to extend the deferral period for tax deferrals granted during the pandemic by an additional maximum of 36 months. During this extended period, companies must follow an individual installment plan. The Swedish Tax Agency decides on the design of the installment plan, but the government has indicated that installments can in many cases be expected to be evenly distributed during the repayment period. The maximum deferral period thus becomes five years.

The Swedish Tax Agency may revoke a deferral in whole or in part if a deficit on the tax account has been submitted to the Swedish Enforcement Authority for collection after an additionally extended deferral period has been decided. A deficit on the tax account may arise, for example, if payment according to the installment plan is not made on time.

Based on the repayment rate to date, the government has estimated that approximately 13,000 companies will need to apply for additional deferrals and installment plans, with a total deferral amount of approximately SEK 13.5 billion. The government has assumed that the repayment rate on the deferral amount is 50% per year.

Analysis

It can be noted that a large number of companies have utilized the tax deferral option during the COVID-19 pandemic and that these companies have been granted a substantial total deferral amount (approximately SEK 56 billion). A large portion of the total granted deferral amount had been repaid at the beginning of 2022. However, a large number of remaining tax deferrals expire during the spring of 2022, beginning at the turn of March/April 2022.

The government expects that the previously applicable maximum deferral period of two years will not be sufficient for approximately 13,000 companies, which will require an additional three years, i.e., a total of five years, to repay their tax deferrals. These companies, the absolute majority of which are small businesses, will, according to the government’s estimate, have an average of just over one million kronor each to repay through such an installment plan.

If the company is unable to comply with the installment plan, the entire deferral amount risks becoming due for payment, which in many cases would result in the company becoming insolvent. One way for an otherwise viable company to obtain a respite from payment of the tax debt in such a situation, often combined with debt reduction through a composition, may be to undergo corporate restructuring.

Peter Eriksson
Attorney and Partner

[email protected]

070-545 21 76

Advokatfirman Carler has extensive experience in insolvency management and our attorneys regularly undertake assignments as corporate restructuring administrators and bankruptcy trustees.