Tax changes lead to review of Sweden’s datacentre development

Swedish government has changed the rules on how it offers tax rebates to datacentre providers and users, hitting domestic companies

Significant changes to Sweden’s energy tax laws have forced the country’s centre-left government to re-examine the state-delivered incentives it offers to home-grown and foreign datacentre operators and investors.

The government is also under pressure to find viable ways to expand the country’s shrinking power production base.

The changes to the energy tax code were implemented after a re-interpretation of tax code reforms affecting datacentres introduced by the Swedish government back in January 2017.

Skatteverket, the country’s tax agency, has now limited the scope for datacentres to qualify for energy-related tax deductions. This unforeseen action could weaken the government’s ambition to grow Sweden as a Nordic hub for datacentre investments and activity. 

Prime minister Stefan Löfven’s minority coalition government has set about reviewing alternative measures, such as state-funded infrastructure, regional subsidies and skills training grants, that could bolster Sweden’s capacity to attract new and increased investments from the biggest names in the datacentre domain, such as Google, Amazon, Facebook, Apple, Microsoft and IBM.

The Swedish government, mindful that the tax changes have put native datacentre operators at a disadvantage to foreign companies, is also working to establish a level playing field for all investors and companies in this expanding sector.

“In practice, the big American companies benefit most from the tax situation,” said Andreas Norman, co-founder and chairman of Bahnhof, one of Sweden’s largest indigenous cloud, co-location and datacentre firms. “This has left a feeling of disruption in the industry.”

Sweden’s 2017 tax reform made a 97% tax cut on any electricity used by datacentres, which had the potential to reduce an individual datacentre’s total electricity bill by up to 40%. The country’s ministry of enterprise and innovation estimates that the datacentre industry saved €44m in energy consumption costs in 2018 because of the tax reduction.

“Tax incentives are important to increase datacentre activity in Sweden,” said Ibrahim Baylan, Sweden’s enterprise and innovation minister. “There are other ways and we are currently looking at the range of available options.”

The government’s 2017 tax reduction policy was aimed mainly at foreign companies, especially operators of energy-intensive hyperscale datacentres that might have been deterred from locating in Sweden because of the high cost of electricity.

Read more about Nordic datacentres

The 2017 tax incentives applied to all datacentres with a total installed power of at least 0.5MW. The cut meant that these datacentres would be charged a rate of tax on electricity use amounting to 0.5 öre (€0.47) per kilowatt hour, which was comparable to the tax rate levied on the country’s manufacturing and processing industries.   

The tax cut had the effect of bringing Sweden’s electricity prices into line with those available in neighbouring Nordic countries Denmark, Norway and Finland, all of which are also engaged in programmes to attract foreign investors to their datacentre sectors.

In effect, the Skatteverket’s re-interpretation of the 2017 energy tax incentive abolished the rule under which datacentres can apply for a full tax reduction covering all aspects of electricity consumption.

The revised tax benefit is restricted to electricity used for production and for the datacentre operator’s cooling operations, including electricity used by pumps and fans. The tax cut does not apply to non-core production power usage areas and functions such as office administration units, storage facilities and security lighting equipment.  

The reach of the energy tax benefit has also changed under the new Skatteverket rules. As a result, a company that rents out space in a datacentre to a bank or other client that stores data on its own server equipment will not receive any energy tax reduction. According to the new rules, it is the bank or other entity that is entitled to apply for the tax benefit, because it is considered to be the party consuming the electricity in the server equipment.

Under the Skatteverket’s updated rules, the bank or other party would also be entitled to receive the tax benefit even if it rented the server equipment from the datacentre company. The datacentre is entitled to claim a tax reduction only if it stores data on its own server equipment on behalf of client companies. The new tax rules say the datacentre is the party recognised as the consumer of electricity. 

Swedish datacentre operators file for bankruptcy

The tax rule changes have had a negative impact on Sweden’s indigenous datacentre companies, a number of which have filed for bankruptcy this year.

Unlike native companies in the sector, leading international players, such as Amazon Web Services, Google, Facebook and Microsoft, provide their own hardware and associated platform services. Such companies, all of which are expanding their datacentre operations in Sweden, are entitled to continue to apply for the full tax discount on energy use. 

The Skatteverket has defended its decision to re-interpret the 2017 tax incentives, arguing that the revision clarifies the tax position of both datacentres and their clients.  

Titti Campalto, a section head at the Skatteverket, said: “In fundamental terms, the new interpretation means that it is the party that uses the equipment in a datacentre that is entitled to apply for a refund, or avail itself of the lower tax benefits.”

Contracting operating margins and falling profits contributed to the bankruptcies of datacentre operators Bolooba and Teschshelf in the first half of 2019. Both companies, which rented server hall space to clients, had benefited from the 2017 tax rules.

Like many indigenous datacentre operators, Teschshelf and Bolooba had used business models calibrated to take advantage of the full range of cost cuts set out in the government’s 2017 tax reform.

The Skatteverket’s re-interpretation of the rules dramatically changed the commercial landscape for datacentre server hall renters like these, who found themselves unable to extract the maximum tax refund value from all their datacentre operations.   

But despite the problems for Swedish companies, the tax changes have not caused major international players to reconsider their investment plans in Sweden. Microsoft, for example, is poised to build a network of new datacentres to support the expansion of its global cloud computing activities.

Tomas Sokolnicki, investment adviser at Sweden’s state-run enterprise development authority, Business Sweden, said: “The datacentre industry needs to find ways to limit its carbon footprint on a global scale. Companies like Microsoft benefit from the renewable power, infrastructure and environmental solutions that we have in Sweden. As an industry, Sweden enables companies to reach the next level of sustainability.”

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