Legal Alerts/2 Nov 2012

Legal Alert – Limitations to The Deductibility of Interest in Business Taxation

The Finnish Government has released the final government bill proposing limitations to the deductibility of interest expenses in business taxation. The goal of the proposed regulation is to secure Finland’s tax base and to balance competition between domestic and foreign groups of companies.

At the moment, interest expenses are widely deductible in business taxation and deductibility can be restricted only by applying the transfer pricing regulation or the general provision for tax avoidance. Applying the new regulation will not require any intention of tax avoidance or deviation from arm’s length principle.


According to the bill, limitations will be applicable to corporations, partnerships, corresponding foreign entities and their permanent establishments. However, the limitations will not apply to financial, insurance, and pension institutions. Interest limitations only apply to business profits. This will exempt housing companies and certain other real estate companies from the scope of the restrictions.

The limitations will be applied only if the interest expenses exceed the interest income received by the company, i.e. if the company has net interest expenses. Interest may become non-deductible if the net interest expenses exceed 30% of the company’s adjusted business profits (i.e. taxable business profits adjusted with the aggregate amount of interest costs, depreciations, losses and change in value of financial assets and group contributions received, deducted with the amount of group contributions paid).

According to the bill, a general safe haven of EUR500,000 will apply. If the net interest expenses (including third party and related party interests) exceed €500,000, the interest limitation will be applied to the entire amount.

Interest payments for third party loans will not be affected. However, third party loans will be deemed as intra-group loans if a related party pledges to an unrelated party a receivable as security for the loan and the unrelated party provides a loan to another related party, or the loan from an unrelated party is de facto a back-to-back loan from a related party.

Further, based on the bill, interest expenses will remain fully deductible if the equity ratio of the company is equal to or higher than the consolidated equity ratio of the group.

The proposed regulation allows an indefinite carry forward of non-deductible interest expenses and deduction of such interest expenses provided that the limitations are not exceed. Change of ownership will not affect the possibility to carry forward interest expenses. In a merger, interest expenses carried forward would pass to the acquiring company, and in a division, they would pass in so far as they have resulted from the transferring business or for the part that equals to the transfer of net assets. Carry forward of interest deductions cannot be passed in a transfer of business.


Company A has interest expenses worth EUR1,000,000. This exceeds the amount of the general safe haven of EUR500,000, so a further analysis is needed.

EUR500,000 of the interest expenses is paid to a related company B, and in addition, a related company C has provided a receivable as a pledge for a bank loan which generated EUR200,000 of interest expenses.

Company A has adjusted business profit of EUR 2,000,000. The maximum deductible interest equals to 30% x EUR2,000,000 = EUR600,000.

Company A has interest expenses worth EUR1,000,000 – EUR600,000 = EUR400,000 more than the 30% threshold allows. Out of all interest expenses, EUR 500,000 + EUR 200,000 = EUR 700,000 are interest expenses paid to the related parties.

Third party interest expenses (EUR300,000) remain deductible regardless of the limitations. Related party interest expenses exceeding the remaining threshold (EUR 700,000 – EUR 300,000 = EUR 400,000) will become non-deductible but may be carried forward indefinitely.


The limitations will be applicable as of tax year 2014 and will have a significant impact in Finland on domestic and cross-border financing structures. Therefore current structures should be analyzed in detail and necessary changes should be considered carefully.

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Additional information

Janne Juusela



Einari Karhu