Finland Tax Alert - 20 November 2012
Changes proposed to Transfer Tax Act
By Outi Ukkola, Tomi Karsio and Juha Mäkäräinen
The Finnish government has submitted a proposal to parliament that would expand the tax base and scope of the transfer tax and increase the rate from 1.6% to 2% on the transfer of shares in real estate companies. If approved by parliament, the new rules are expected to apply to transactions where the relevant contract is signed on or after 1 January 2013. The purpose of the amendments is to prevent the use of artificial structures to minimize transfer tax liability and to put the transfer tax treatment of share transfers and real estate transfers on a more equal footing.
Current law and practice
Finnish transfer tax is payable upon the transfer of shares in a Finnish company and the transfer of Finnish real estate. The tax liability falls on the purchaser. Transfer tax generally is payable where the transfer is of shares in a Finnish target company and either the seller or the buyer is resident in Finland. However, if neither the seller nor the buyer is Finnish resident, no transfer tax liability arises unless the transfer involves the transfer of Finnish real estate or the transfer of shares in a real estate or housing company or a company more than 50% of whose assets consist of real estate situated in Finland.
The current tax rate is 4% on the transfer price of real estate and 1.6% on the transfer price of shares. In addition to the transfer price/consideration paid, certain other compensation elements can trigger liability to transfer tax; for example, if the purchaser assumes a loan of the seller or the target company pays a dividend to the seller post-transaction, these compensation elements generally trigger transfer tax liability.
Over the years, taxpayers have used various structures to minimize the transfer tax liability on the transfer of real estate (the rate of which is 4% versus 1.6% on share transfers). The proposed rules aim to eliminate the use of these structures and to reduce the disparity in the tax rates between the two types of transfers.
Proposed changes to the tax base
The proposed rules would make changes to the transfer tax base both in the case of the transfer of shares of a Finnish company generally and in the case of the transfer of shares in a real estate company.
Transfer of shares:According to the proposed rules, the tax base of the transfer tax would include – in addition to the purchase price – any payment made by the purchaser that is a prerequisite for the transfer, as well as any liability the purchaser assumes where the seller benefits from the arrangement. For example, the purchaser may agree to refinance a loan of the target company or agree to pay compensation for the transfer of a receivable (loan of the target) held by the seller. In these situations, the seller is essentially being compensated for its contribution to the loan capital of the target, so transfer tax liability would arise. Indirect benefits also would be taken into account; for example, if a company belonging to the same group as the seller finances the target company and the purchaser repays the loan taken out by the target company to the lender, the repayment likely would be included in the transfer tax base.
Transfers of shares in real estate companies and shares in comparable real estate-rich companies:Under the proposal, certain typical loan arrangements would be included in the transfer tax base. The loans concerned generally are determined in the articles of association and are attributable to designated shares. If the purchaser repays a loan attached to such shares on the transfer of the shares, transfer tax would be due on the amount of the loan repayment as well as on the purchase price of the shares. Transfer tax also would be triggered if, at the time of transfer, the purchaser has any right or obligation (based on the articles of association, a shareholders’ resolution or resolution of the board of directors) to repay a loan attached to such shares.
General loans of a target real estate company would not be included in the tax base. Special rules would apply to loans obtained during the construction of a building where shares are transferred during the construction period.
Extension of the scope to cover indirect real estate structures
The scope of the transfer tax would be expanded to cover indirectly held real estate.
First, the proposed changes would cover structures in which a Finnish real estate company is held by a Finnish holding company. If the shares of the holding company were sold, transfer tax would become payable as if the shares of the real estate company had been sold. Therefore, two-tier holding structures would not eliminate transfer tax liability under the proposed rules.
Additionally, the government’s proposal would extend to certain foreign holding companies that are used to avoid Finnish transfer tax. For example, if an investor sets up a holding company in a country that does not tax transfers of real estate companies, it is possible – under current rules – to eliminate Finnish transfer tax. In this structure, the investor sets up a non-Finnish holding company that holds shares of a Finnish real estate company and then sells the shares of the holding company. If the government’s proposal is approved, it would no longer be possible to avoid Finnish transfer tax liability by resorting to such arrangements, since the transfer of the shares of a non-Finnish holding company would be subject to the Finnish transfer tax if both the following conditions are satisfied:
- Where the non-Finnish holding company holds real estate investments in another jurisdiction or other jurisdictions, as well as Finland, more than 50% of the holding company’s total assets are comprised of directly or indirectly owned Finnish real estate (the fair market value of the assets would be the basis for this the evaluation); and
- One of the parties to the transaction (i.e. either the seller or the purchaser) is resident in Finland or is a Finnish branch of a nonresident financial services company.
Proposed tax rate increase
It is proposed to increase the transfer tax rate from 1.6% to 2% for transfers of shares of the following real estate companies or comparable real estate-rich companies:
- Housing companies, real estate companies (mutual or ordinary), and housing or real estate cooperatives;
- Other companies whose operations consist mainly of the ownership or possession of real estate;
- Companies whose operations consist mainly of the ownership or possession of shares in the companies referred to in 1) and 2) or the direct or indirect ownership or possession of real property situated in Finland; and
- Non-Finnish companies whose operations consist mainly of the direct or indirect ownership or possession of real estate and more than 50% of whose total assets consist of directly or indirectly owned Finnish real estate. (The transfer of shares in such companies would be subject to Finnish transfer tax, if the seller or the purchaser is tax resident in Finland or is a Finnish branch of a foreign financial services company – see above).
If approved in the proposed form, the rules would mean that most financing and structuring arrangements involving share transactions would have to be carefully analyzed from a Finnish transfer tax perspective. The transfer tax is a self-initiated tax and the taxpayer must pay the tax without any tax assessment issued by the tax authorities. As a result, the taxpayer bears all penalty and late payment consequences of any misinterpretation of the rules.