The Finnish Supreme Administrative Court (SAC) issued two significant precedents on 23 September 2019 in cases, which substantially limit the concept of consideration for transfer tax purposes. According to the SAC, transfer tax was not payable on compensation paid for shareholder loan receivables that the purchaser has acquired in connection with a share acquisition. This interpretation derogates from the observed practice. In the other case the liabilities the purchaser had assumed for the target company’s future debts were not regarded as compensation on which transfer tax is payable. These new precedents may justify the reclaim of transfer tax on prior transactions.
The purchaser is liable to transfer tax upon transfer of real estate and securities. Transfer tax is payable on the purchase price and equivalent consideration that the purchaser pays to the seller.
The Finnish Transfer Tax Act was amended in 2013 by extending the definition of consideration. At that time, the definition was extended to also cover compensations that in fact financially benefit the seller. According to these previous amendments, such compensations comprise agreed payments to third parties and liabilities that the purchaser has agreed to assume towards the seller or third parties, if such compensations benefit the seller. With respect to real estate companies, the tax base became even broader and may include, for example, housing company loans and construction loans attributable to acquired shares.
Ever since, transfer tax has been payable on e.g. consideration for acquiring shareholder loan receivables and liabilities for refinancing the target company. The rulings of the SAC limit this practice and clarifies the question in which circumstances transfer tax will be payable on such compensations.
The SAC’s rulings
In ruling SAC 2019:121, the Court held that transfer tax was not payable on consideration to the seller for acquiring shareholder loan receivables, as the purchaser did not assume any liability for the target company’s debts:
- The court reasoned that the scope of the law would have extended beyond real estates and securities if the transfer tax base were to cover the consideration for shareholder loan receivables – in general, shareholder loan receivables are not such securities referred to in the law.
- The court also looked into whether such consideration were to be regarded as compensation that fall under the wording of the law. The court held that becoming a mere successor or paying consideration to the seller does not mean that the purchaser would have assumed liability for the target company’s debts – to regard the reasoning in the preparatory works in favour of an extensive interpretation as decisive ground would have compromised the principle of legality if not overridden.
In the circumstances of ruling SAC 2019:122, a housing-company and the selling company had concluded a construction contract, according to which the selling contractor company was liable to construct a new building for the housing company. The purchaser had assumed liability for the contractor’s future receivables towards the contractor and the bank financing the receivables. The court held that such future debts could not be included in the tax base:
- The preparatory works suggested that transfer tax should not be payable on future debts that require a counter-performance or similar performance in order to become final even if the purchaser had assumed liability towards the seller and the bank.
- In addition, the court held that the provision regarding construction loans was inapplicable. Construction loans are included in the tax base when shares are transferred during the construction project or before it has begun. However, as in this case the relevant amount was determined by the amount of debt at the time of transfer of title, and future debts following the transfer of title were not included in the tax base.
- Moreover, as the purpose of the provision regarding construction loans is to include loans that would not have otherwise been taxable for transfer tax purposes, this provision would have become a dead letter if inclusion of future debts on any other grounds had been permissible.
The ruling on compensation for shareholder loan receivables overturns the prior practice. However, the court did not rule on any other types of arrangements, such as refinancing of the target company’s debts, which remains relevant in transfer taxation. The ruling opens alternatives to refinancing arrangements and highlights the need for careful planning and implementation of future transactions.
The latter case affirms that transfer tax should not be payable on any future debts that require a counter-performance after transfer of title. This statement is a necessary clarification. As real estate company transactions often entail other questions that are still judicially unresolved, a careful planning of transactions is of importance in future as well.
These new precedents may justify the reclaim of transfer tax on prior transactions. Reclaims for taxes paid in 2014–2016 are subject to a 5-calendar-year limitation following the payment year, i.e. the refund for taxes paid in 2014 is open for reclaim to the end of 2019. Share transfers executed in 2017 or later are subject to a shorter 3-calendar-year limitation following the transaction year.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding these new rulings.