References/4 Apr 2023

We represented Vaaka Partners Oy in a Supreme Administrative Court ruling regarding an EU ATAD hybrid mismatch situation

We represented our client, i.e. Finnish private equity firm Vaaka Partners, in a recent ruling issued by the Supreme Administrative Court (KHO 2023:31).

The ruling concerned the application of EU ATAD anti-hybrid rules in a situation where a Finnish PE fund (established in the form of a limited partnership) acquired, through a typical Finnish TopCo-BidCo structure, shares in a Finnish target company.

The acquisition was financed i.a. by interest-bearing loans raised from the fund, with interest payments being made by TopCo to the fund. The fund held approximately 66.9% of the TopCo shares, while management and employees of the target group formed the minority.

The fund’s investors (limited partners) consisted mainly of institutional, Finnish, and foreign investors. In Finland, limited partnerships are considered transparent flow-through units, whose profits are taxed in the hands of its partners.

Three of the fund’s investors resided in jurisdictions where the interest income was not included in their tax base. This created a hybrid mismatch situation (hybrid entity). The investors’ aggregate stake in the fund amounted to approximately 24.6%.

TopCo and fund investors were not “acting together”

The anti-hybrid rules can only be applied where the dissymmetry in tax treatment is realised between associated entities. This requires a participation rate of at least 50%, or 25% for financial instruments. For stakeholders that can be deemed to be “acting together”, the participation is aggregated.

The Court found that there was a dissymmetry in the tax treatment of the interest payments between Finland and the foreign jurisdictions. However, the limited partners and TopCo were not found to be acting together despite the investors’ indirect participation in TopCo’s equity, or their voting rights in the fund. The determination was not impacted by the fact that the general partner of the fund was authorised to manage its day-to-day business and control its investments alone.

The ruling clears up uncertainty in common PE investment structures

The ruling substantially clarifies the application of the hybrid mismatch rules in customary Finnish PE structures, and in practical terms, it should ease the administrative burden borne by fund managers.

Although the limited partners in this case resided in the EU, the principle of acting together as clarified by the Court has relevance also with respect to third countries (e.g. US check-the-box elections). Now that this ruling exists, these situations should not trigger the application of the anti-hybrid rules provided that the general participation thresholds are not exceeded.

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Heikki Wahlroos



Max Malinen

Senior Associate