Finland Tax Alert - 16 April 2012
EBITDA-based limitation on related party interest proposed
By Outi Ukkola, Tomi Karsio, Tomi Pitkänen, Pia Aalto and Jani Hirvonen
Finland's Ministry of Finance issued a draft proposal on 12 April 2012 that would limit the deduction of interest on related party loans. According to the draft, a full deduction would be allowed for interest expense if the borrower has interest income, but the deduction of the excess amount would be limited to a maximum of 30% of profit before interest, tax, depreciation and amortization (EBITDA). Finland currently does not have a specific limitation on interest deductibility and the substance-over-form and anti-avoidance rules generally have not been used to limit such deductions.
The proposed rules would not limit the deductibility of interest on loans granted by unrelated creditors, and net interest expense always would be deductible up to EUR 500,000 per tax year to ease the administrative burden. All Finnish and nonresident limited liability companies and partnerships would fall within the scope of proposed rules. The rules also would cover passive income earners, such as companies operating in the real estate industry.
Parties would be deemed to be related for purposes of the EBIDTA limitation rules if one party had direct or indirect control over the borrower. Control would be established if the beneficial owner of the interest held at least 50% of the capital or voting power or the right to nominate a certain number of board members or other factors were present that constitute control. Back-to-back and collateral arrangements would be taken into account when assessing the deductibility.
Any interest that could not be deducted because of the EBIDTA limitation could be carried over 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).
If approved in its current form, the proposed law would enter into force on 1 January 2013 and be applied for the first time when assessing taxes for 2013.
The draft proposal has been circulated for comments, but it is unlikely that comments will materially change the contents.