We recently represented a Finnish financing provider in relation to an advance ruling where the court considered whether different fees for both recourse and non-recourse factoring arrangements can be treated as interest income under the Finnish interest deduction limitation rule set forth in the Finnish Business Income Tax Act (“BITA”).
Under the advance ruling recently issued by the Finnish Central Tax Board (23/2022), a wide range of factoring fees charged by the factoring provider for both non-recourse and recourse factoring should be considered as interest when applying the domestic interest deduction limitation rules. The advance ruling will be published by the Central Tax Board in the near future.
Basics of the ruling
Deductibility of interest expenses can be limited for tax purposes under the interest deduction limitation rules. The definition of interest for the purposes of applying the interest deduction limitation rule derives from the definition of “borrowing costs” set forth in the EU Anti-Tax Avoidance Directive (2016/1164) and the domestic implementation thereof. Under the Finnish rules, the definition of interest income and interest expense is symmetrical.
The Central Tax Board stated that factoring is construed as a financing arrangement, which, from the factoring company’s point of view, constitutes a provision of debt finance to customer companies. This interpretation is not contingent on whether factoring is based on pledging of account receivables against credit (recourse factoring) or an invoice purchase agreement between the factor and the customer (non-recourse factoring). The fees in question included factoring commission, credit limit fee, arrangement fee, periodical fee and invoice handling fee.
According to the issued advance ruling, the factoring fees and charges arising from both recourse and non-recourse factoring fall widely within the definition of interest in Finland, and therefore, they are subject to the interest deduction limitation rule under the BITA.
Impact of the ruling
The Central Tax Board’s advance ruling provides clarity on the definition of interest income and interest expense, but at the same time it also widens these definitions. Both the factoring providers who are subject to the interest deduction limitation rule and the companies using factoring finance should take this into account.
However, the ruling is not yet legally binding.
If you have any questions regarding the matter, please feel free to contact any of Borenius’ attorneys listed in this alert or those with whom you usually work.