The Finnish interest deduction limitation regime will be subject to substantial changes due to the implementation of the EU Anti-Tax Avoidance Directive. The Finnish Ministry of Finance published a draft government bill containing the proposed amendments on 19 January 2018. These amendments would lead to a stricter interest deduction limitation regime in Finland.
Based on the draft government bill drawn up by the Ministry of Finance, the regulation would be amended as follows:
- Rules would apply to all Finnish tax resident corporate entities, i.e. not only entities conducting business activities;
- Interest paid on loans from third parties, e.g. bank loans and bonds, would also become subject to regulation (and may become non-tax deductible);
- The current ‘safe haven’ rule would remain at EUR 500,000 for net interest expenses paid on loans from dependent entities, but a safe haven of EUR 3 million for net interest expenses paid on loans from independent entities would be introduced;
- The exemption based on a balance sheet test would no longer be available; and
- The definition of interest would become broader, covering also e.g. financial leasing, derivative instruments, guarantee fees and banks’ arrangement fees.
The suggested changes would have implications especially to Finnish tax resident entities that are carved out of the current interest deduction limitation regime as they are not companies conducting business activities. Consequently, e.g. interest payments in large real estate holding structures may become subject to limitations as of 2019.
Furthermore, companies that issue bonds or have major loans from external banks may also need to consider recapitalisation. This may affect not only ordinary operative companies but also listed entities, including the planning of M&A transaction structures.
As regards private equity and real estate funds, the proposed rules would have an impact on the use of leverage (on the fund and holding company level) and on feeder fund structures using profit-participating loans.
In addition, as proposed in the draft government bill, e.g. banks and insurance companies would no longer be outside of the scope of the interest deduction limitation restrictions.
The Ministry of Finance has invited comments from interested parties by the end of February. We are expecting to receive the finalised government bill reflecting these comments before this summer. The amendments would enter into force at the beginning of 2019.
Although the final interest deduction limitation regulation may eventually deviate from the form proposed in the draft government bill, companies belonging to a group structure – i.e. companies that have one or more dependent entities or a permanent establishment – should evaluate their lending structures and consider whether re-evaluation is needed in the event that the proposal enters into force as it is.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this legal alert. Please feel free to contact any of the Borenius’ attorneys listed in this alert or those with whom you usually work.