On 21 June 2016, the EU Member States reached a consensus on an amended text of the Anti-Tax Avoidance Directive (“ATAD”). The aim of the directive building on BEPS recommendations is to shut off major areas of aggressive tax planning. ATAD applies to all taxpayers that are subject to corporate tax in the EU. The implementation of the ATAD will lead to changes in corporate income tax rules, although the directive only sets the minimum standards for Member States.
The initial proposal set out six anti-avoidance measures but only five of them were accepted to the final draft Directive. The new anti-tax avoidance provisions are:
- Limitations on deductibility of interests. This rule limits the deduction of net interest costs to the higher of (i) 30% of the taxpayer’s EBITDA and (ii) EUR 3 million. The rule does not distinguish between third party and related party interest expense. In the current Finnish interest deduction limitation system, the respective thresholds are 25% and EUR 0.5 million; however the restrictions only apply to related party interest expenses.
- Exit taxation. The aim of exit taxation is to prevent companies from re-locating assets purely to avoid taxation. The scope of these provisions includes transfers of assets between head offices and permanent establishments, and transfers of tax residence.
- General anti-abuse rule (GAAR). GAAR allows for tax authorities to ignore a non-genuine arrangement that has been conducted for the main purpose or one of the main purposes of obtaining tax advantage that defeats the object or purpose of applicable tax law. The wording of the GAAR corresponds to the wording of the general anti-abuse rule of the 2015 amendment to the EU Parent Subsidiary Directive.
- Controlled foreign company (CFC) rules. CFC rules are laid down to prevent profit shifting from parent companies in high tax countries to controlled subsidiaries in no or low tax countries.
- Framework to tackle hybrid mismatches. Hybrid mismatches are situations in which an entity is qualified differently in two Member States. The rules also apply to hybrid mismatches caused by a different legal characterization of a financial instrument. In addition, the EU Council requests the European Commission to put forward a proposal for hybrid mismatches with non-EU countries by October 2016.
Deductibility of interests topical in Finland
Of these five measures, interest deductions are the most topical question in Finnish taxation since the Finnish Supreme Administrative Court issued two important new precedents in May 2016. In both rulings the deductibility of interest expense resulting from an intra-group sale of shares was denied from a Finnish branch. The impact of these rulings on acquisitions where debt is pushed down to Finnish limited liability company (acquisition vehicle) remains to be seen. The Finnish Tax Administration is currently reviewing several debt push down arrangements.
Currently debt push-down arrangements, including branches, are not advisable without applying for a preliminary ruling in advance – even if at all. The use of limited liability acquisition vehicles and debt push down should be carefully planned in future acquisitions. As for prior arrangements, companies should examine their existing structures and re-evaluate tax risks case by case.
The Member States, including Finland, have to implement the draft as of 1 January 2019. However, implementation of some of the measures may be further postponed and implementation of the interest deduction limitation rule can be postponed until OECD members agree on a minimum standard on the issue, but no later than 1 January 2024, provided the Member States already have equally effective national rules in place.
The rules of the ATAD merely set the minimum required standards. Member States may apply additional or more stringent provisions.