Finland Tax Alert - 2 October 2012
MOF revises proposed intragroup interest deduction limitation rules
By Tomi Karsio, Outi Ukkola, Pia Aalto and Mikko Jantunen
On 17 September 2012, Finland’s Ministry of Finance issued a new draft proposal that would limit the deduction of interest on related party loans. Although the draft generally is unchanged from the version issued in April 2012, it contains modifications (discussed below under “Revisions”) to the effective date giving companies more time to prepare and to the scope of the provisions based on comments received.
According to the draft rules, interest expense paid on related party loans would be fully deductible provided the borrower had interest income, but the deduction would be limited to a maximum of 30% of profit before interest, tax, depreciation and amortization (taxable EBITDA). Group contributions granted and/or received would be part of the taxable EBITDA.
Parties would be deemed to be related for purposes of the EBITDA limitation rules if one party had direct or indirect control over the borrower, or if a third party had control over both parties in the debt relationship. Control would be established if one party held at least 50% of the capital or voting power or the right to nominate a certain number of board members of the other party, or other factors were present that constitute control.
Any interest that could not be deducted because of the EBITDA limitation would be available for carryforward to future tax years and deducted according to the 30% limit. Specific rules would apply in the case of reorganizations (mergers, demergers and transfer of assets). A full deduction would be allowed for interest expense up to the amount of interest income of the borrower. Furthermore, if the net interest expense of the borrower is EUR 500,000 or less, the total amount of interest expenses would be tax deductible and not subject to the limitations. However, if the amount of net interest expense exceeds EUR 500,000, the interest deduction limitations would be applied to the total net interest expense.
The interest deduction limitation rules would not be considered anti-avoidance rules and, for purposes of their application, the business rationale for the capital structure would not be examined. However, the capital structure and interest rates would have to conform to the arm’s length principle or face challenge under other tax provisions (i.e. anti-avoidance and hidden dividend distribution provisions).
The revised version of the proposed rules contains the following changes:
- The interest deduction limits would not be applicable if the equity ratio (i.e. the ratio between the total equity and total assets) of the company was equal to or greater than the equity ratio of the whole group based on the audited financial statements of the group.
- The definition of a related party loan would be narrowed slightly, specifically with respect to collateral arrangements and cash pooling between related parties.
- Financial, insurance and pension institutions would fall outside the scope of the new rules, as would entities that are subject to tax laws other than the Business Income Tax Act (the latter exclusion would be particularly relevant to real estate investment businesses).
- If approved, the changes would enter into force on 1 January 2013 and be applied for the first time when assessing taxes for 2014 (the earlier proposal had the new rules applying for assessing taxes for 2013). Therefore, the limitations would be applicable to financial years ending on or after 1 January 2014.
The final draft of the rules will likely be presented during October 2012.