The Finnish Supreme Administrative Court (SAC) issued a precedent on 9 March 2015 (KHO 2015:33) under which a Finnish resident individual lender may be taxed on accrued interest income even if the interest has not yet been paid. The case concerned a subordinated unsecured shareholder loan given by a Finnish resident individual as a minority shareholder.
In the case at hand, it was agreed in the loan agreement that the interest will be paid off only at maturity upon the repayment of the debt principal. Under the loan agreement, following the end of each 12-month interest period, interest started to accrue on the amount of unpaid interest as well. In practice, the agreement was close to an arrangement where the accrued but unpaid interest is added to the loan principal or capitalised at the end of each interest period. The lender did not dispose of the interest in any manner during the loan period, and the parties made no other agreements concerning the interest income.
In Finnish taxation, individuals are normally taxed only on income that has been paid to them, or that has otherwise been at the individual’s disposal. Thus, the SAC’s ruling can be seen to limit the scope of this principle. The ruling may be problematic in practice since the payment of tax must be financed before any income has been paid out. Further issues may arise in situations where the borrower is in default and cannot pay any interest that has already been taxed.
The structuring of shareholder loans and their interest clauses should be planned in detail in the future in order to reach the desired economic result without the need to pay taxes before the income is actually realised.