Insight

Welcome to our platform for insight into all the latest in law and business. We hope to inspire and share big ideas that make the difference driving your business forward.

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The Government Proposal on Changes in Taxation of Electricity Storage
8 Nov 2018 The Government Proposal regarding amendments to energy taxation has been submitted to the Parliament on 18 October. The most significant changes relate to electricity storages. Pursuant to the Proposal, electricity would be transferred to electricity storages without any excise duty on electricity. The excise duty would be paid when electricity is transferred to be consumed. The need for electricity storages has arisen since more and more electricity has been produced by using renewable energy sources such as wind and solar which are not flexible. The electricity storages can be used to even out the variation in supply and demand of electricity and prices. However, current legislation does not recognize electricity storages at all. Therefore, the excise duty on electricity has been paid twice, for example, in circumstances where the storage has been first charged from the grid and later supplied back to the grid to be consumed. The purpose of the Proposal is that transmission of electricity to the electricity storage would be duty free. The excise duty would be paid when electricity is transferred to be consumed from the duty free electricity storage. The condition would be the electricity storage is deemed to be a part of the grid or a power plant; or an owner of the electricity storage has a permission from the Tax Administration to uphold the duty free energy storage. In order to meet the purpose of the Proposal the definition of the grid would be broadened. The electricity storage would be deemed to be a part of the grid if the electricity storage is connected to the grid and no electricity can be transferred to be consumed from the electricity storage. In addition, the definition of a power plant would be changed. In the future, the power plant would mean a fixed functional unit which acts in a certain area and its purpose is to produce electricity (and heating) and store electricity in the electricity storage. Owners of electricity storages which are not a part of a grid or a power plant in accordance with the law should apply permission of the Tax Administration in order to be owners of a duty free electricity storage. Consequently, the Proposal allows duty free electricity storage for different operators as power plants, grid companies or end consumers or storage service providers. The recast electricity market directive, currently under legislative process in the EU, seeks to promote market based energy storage. It would limit the distribution and transmission systems operators (DSO and TSO) involvement with energy storage facilities. Among others, DSOs and TSOs would be prohibited from owning and operating storage facilities, except in cases where no other parties have expressed interest, or where the storage facility is necessary for fulfilling the DSO's or TSO's obligations. Exceptions are subject to approval of the regulator. Member States would have to re-assess whether third parties would be able to own, develop and manage or operate the storage facilities, in which case the operations of DSOs and TSOs would be phased out. We welcome the removal of double taxation. However, according to the Proposal, the electricity storage means only a unit of equipment, machines and buildings which are required in order to temporary store electricity electrochemically. Our view is that the definition of an electricity storage should not be limited only to storages based on electrochemical technology. The limitation might delay development of new technology and its adoption to use. Taxation should be neutral for all technology solutions. With the current wording, storage solutions based on for example power-to-gas or kinetic technology would not be duty free. The purpose of other, more technical, changes to energy taxation is to promote the use of natural gas instead of coal, which is part of the Government's plan to encourage the early phase-out of combined heat and power plants using coal by 2029. The proposed changes would enter into force in the beginning of 2019. Due to developments in technology and promotion of the transfer towards more sustainable energy system, changes in energy taxation as well as energy storages in general can be expected also on the EU level. We are happy to discuss in more detail the proposed legislation in concrete situations.
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New CFC Rules Require Review of Corporate Structures
6 Nov 2018 The Finnish Government issued a government proposal on controlled foreign company ("CFC") rules on 1 November.  The proposed rules would enter into force at the beginning of 2019 and would apply already for tax year 2019. Through these rules, the Anti-Tax Avoidance Directive (2016/1164, the "Directive") adopted by the EU is further implemented in Finland. The proposed rules are stricter than the currently applicable CFC rules in particular for Finnish companies with subsidiaries outside of the European Economic Area ("EEA"). In principle, the government proposal follows the main features of the draft proposal published earlier this year with the exception of widening the exempted activities to certain services. Overview of Proposed Rules General In brief, foreign entity's income is subject to CFC taxation in Finland if a Finnish tax resident, together with its related parties, has sufficient control in the foreign entity, the foreign entity's level of taxation is significantly lower than in Finland, and the genuine economic activities exemption is not applicable. If an entity qualifies as a CFC, the proportion of the income of the CFC controlled by Finnish tax residents is taxed as their income in Finland. According to the proposed new rules, the type of income received by the foreign entity or the artificial nature of the transactions would not be relevant in the assessment. Thus, Finland would not implement either of the alternative models laid out in the Directive as such but instead the new rules follow similar approach as the current rules. Control The new proposal imposes a participation threshold of 25% for the CFC rules to apply. The participation by the Finnish resident's related parties (based on also the 25% threshold) in the foreign entity is included in the assessment. This presented participation threshold is significantly stricter than the 50% threshold adopted by the Directive and the 50% threshold of the current CFC rules. In practice, the low CFC threshold significantly expands the scope of the rules. It may also prove to be challenging to obtain necessary information to assess potential CFC taxation when the participation in the CFC is e.g. only 25%. Level of Taxation According to the proposal, a CFC is an entity with an actual level of taxation of less than 60% of the actual level of taxation the entity would be subject to in Finland. Finland’s current corporate income tax rate is 20%, which leads to an effective tax rate threshold of 12%, when the foreign entity's taxable income is calculated in accordance with the Finnish rules. The level of taxation is assessed separately for each year. The proposed new rules do not take into account the timing differences, e.g. different depreciation rules. More accelerated depreciation rules than the Finnish depreciation rules may trigger CFC taxation for the years when larger depreciations are deducted even though the level of taxation over the years would not be lower than the above mentioned threshold. Exempted Activities The main exemption in the proposed rules is the genuine economic activities exemption. The concept of genuine economic activities is assessed differently depending whether the foreign entity is a EEA resident company or not. The proposal follows the Directive’s, as well as the current CFC rules', framework of excluding EEA resident companies with genuine economic activities from CFC taxation. This requires sufficient level of personnel, premises and assets. Outside the EEA, the concept of genuine economic activities also requires that the entity carries out certain type of business activity. The new rules exempt only companies the income of which mainly arises from industrial or other comparable production activities, shipping activities, as well as sales or marketing activities related to such exempt activities. The government proposal widens the current concept of activities comparable to production activities to include marketable services. However, the proposal lists service activities which are not comparable to production activities, such as certain investment management services, holding and transferring of intangibles, as well as intra-group financing, insurance and management services.In addition, adequate exchange of information procedures need to be in place between Finland and other state, and the other state cannot be listed as non-cooperative tax jurisdiction by the EU, for the exemption to apply.Contrary to the currently applicable CFC rules, which have required that the sales and marketing activities could only be performed in the company’s state of residence in order for the exemption to apply, the new CFC rules would also exempt regional sales and marketing hubs from the applicability of the rules, provided that the operations relate to industrial production or comparable activities. This change will provide more flexibility for companies with regional activities. The current exemption applicable to tax treaty resident companies would be abolished. Consequently, the effective level of taxation of such non-EEA resident companies, which do not fall under the genuine economic activities exemption, needs to be monitored. Implications As discussed above, the scope of the application of the CFC rules is significantly widened due to the newly proposed amendments. The different approaches compared to the Directive, as well as compared to the current rules, will likely cause issues to numerous taxpayers. Pursuant to the new rules, genuine business operations subject to low taxation in non-EEA countries may classify as CFCs. In particular, intra-group and other service activities as well as holding company structures may trigger CFC taxation in situations that have so far not been subject to the current CFC rules. Inclusion of service activities to the scope of exempted activities is a welcomed feature but the definition in the proposal leaves room for interpretation. An advance ruling on the interpretation in specific cases may be recommendable in order to achieve certainty on the treatment. Due to the Directive, all EU countries need to implement CFC rules. Also many other jurisdictions have already implemented or will implement CFC rules. This may lead to the taxation of the same company's income as CFC income in several jurisdictions. The proposed Finnish CFC rules do not take this type of double taxation into account at all. Group structures with multiple layers of companies should therefore be reviewed from this perspective. On the other hand, the new rules introduce new options to enhance the group structure for many operators with regional activities due to the extension of the scope of sales and marketing exemption. Do not hesitate to contact us with respect to the proposed changes, we are happy to discuss the matter and its implications to your circumstances.
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Non-compliance with Merger Commitments Escapes Fines
6 Nov 2018 On 24 October 2018, the Finnish Competition and Consumer Authority (the "FCCA") ended a 6-year long investigation concerning a breach of merger commitments relating to the acquisition of C More Group AB ("C More") by TV4 AB ("TV4") in 2008, without seeking any sanctions. The FCCA investigated whether the launch of the MTV Total pay-TV channel package in 2012 by MTV, a subsidiary of TV4, was contrary to the conditions to which TV4 had committed in order to obtain the FCCA's approval for the acquisition.  The FCCA's decision closing the investigation reveals that the FCCA considered that the merger commitments had been breached with the launch of the MTV Total channel package. The FCCA's reasoning for not taking any further action despite this is questionable, and the outcome is unfortunate for the credibility of the FCCA's merger control enforcement. The Law Merger commitments, also known as merger remedies, are conditions and obligations the parties to a concentration may propose to competition authorities in order for an otherwise problematic concentration to be permitted. The object of the commitments is to eliminate the competition concerns identified by a competition authority during the review of a notified concentration. The commitments are attached to the decision clearing the concentration and their compliance is monitored. Non-compliance with commitments may lead to an administrative fine of up to 10 per cent of the annual worldwide turnover of the group of companies in question. The fine is imposed by the Market Court on the FCCA's proposal. Background and Facts In July 2008, TV4, a Swedish company, notified the acquisition of C More to the Finnish Competition Authority (currently the Finnish Competition and Consumer Authority). TV4 belongs to the Swedish Bonnier Group, which is active on the Finnish free-to-air and pay-TV market through MTV. The FCCA's main competition concerns at the time of the merger decision related to the fact that TV4 and C More were the two largest providers of pay-TV services in Finland and they had the broadcasting rights for the main sports events. Following an in-depth investigation – which included extending the Phase II review period twice with the permission of the Market Court – the FCCA finally decided to clear the acquisition in November 2008, subject to several commitments. One of the main purposes of the conditions imposed by the FCCA was that MTV and C More pay-TV services had to be kept separate. In November 2012, MTV launched the MTV Total channel package which combined the MTV and C More pay-TV services. Interestingly, the channel package was launched despite the fact that the FCCA had rejected – in a decision in 2010 – MTV's application to have certain merger commitments lifted. In 2014, two years after launching the MTV Total channel package, MTV applied, again, for the lifting of the commitments. This time the application was accepted in 2015. In 2015, the FCCA also prepared a draft Statement of Objections with a view to asking the Market Court to impose fines for the non-compliance of the commitments. The Outcome The FCCA closed the case on 24 October 2018 without seeking any sanctions. The FCCA's decision (in the form of a memorandum) closing the investigation makes it clear that the FCCA considered that the merger commitments had been breached with the launch of the MTV Total channel package. Despite this, the FCCA did not take the case to the Market Court as it did not consider it reasonable. According to the decision, the reasons of the FCCA for not considering it reasonable to make a proposal to the Market Court for the imposition of fines were as follows: (i) inaccuracy of the commitments, (ii) contradictions between the wording and the objectives of the commitments, (iii) ambiguity of the interpretation of the FCCA's earlier advice, (iv) the length of the FCCA's investigation, and (v) the fact that the conditions had eventually been lifted in 2015 due to significant changes in the market conditions as applied by MTV in its second application to this effect. As can be seen, the reasons for not finding it reasonable to seek any sanctions depend largely on the FCCA itself. Key Observations Despite having merger control rules in place for 20 years, there has not yet been a decision in Finland imposing fines on non-compliance with merger commitments. For a long time, the case at hand seemed to become the first one. The FCCA's withdrawal in this case – and the reasons leading to the withdrawal – are unfortunate for the credibility of the FCCA's merger control enforcement, and also somewhat at odds with its call for tougher sanctions in competition law that has been witnessed in the media and public speeches lately. Also, customers, suppliers and competitors of the parties to a concentration should be able to rely on the fact that commitments cannot be and are not unilaterally lifted, even due to significant changes in market conditions, as in law the power to remove or mitigate the commitments lies solely with the FCCA. Even though the case calls into question the binding nature of merger commitments, one should be careful to draw a hasty conclusion that commitments need no longer be complied with. On the contrary, due to the potentially very severe consequences of non-compliance, it is naturally still important to comply with the commitments. Even though in this particular case the consequences did not materialize, we trust that the case will contribute to improving the development of the practical application of commitments. We represented a competitor of the notifying party in the case at hand.
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Legal developments at the end of the parliamentary term: Focus on effective legal monitoring
18 Oct 2018 As the current parliamentary term approaches its end, the workload of the Finnish Parliament keeps on increasing. There is a multitude of government proposals with high interest to our clients in parliamentary review at the moment, and it is unclear how the time limits relating to e.g. implementing EU directives will hold, and whether there is enough time to complete all relevant proceedings in due course. Transactions and legal solutions concerning our clients' business may be affected by the uncertainty, but we strive to keep our clients informed every step of the way. Everybody knows that it is essential for attorneys to keep up with constantly changing legislation. Insights on anticipated legislative reforms and amendments are something that our clients may specifically request from us. Naturally all our legal advice must be based on up-to-date legislation – taking into account any eventual changes in the near future. Our profession is a knowledge profession, and it is central for our lawyers to keep up with legal developments. In the course of this autumn, legislative processes and reforms have kept us busier than usual. This will continue until next spring, since the Finnish parliamentary elections will be held in mid-April 2019. All proposals submitted to the Parliament by the current Government must be approved during this electoral term, or else they will lapse. Unfortunately, it seems likely that a number of government proposals are destined to lapse, as the parliamentary committees' workload is enormous – and has been since last spring. There are currently several substantial – and also politically controversial – reforms under parliamentary review, such as the introduction of regional government, health and social services reform and government proposals for legislation on civil and military intelligence and on the oversight of intelligence gathering. Parliamentary review of these major reforms takes up a great deal of certain committees' time. The Social Affairs and Health Committee and the Constitutional Law Committee have been particularly burdened. Parliamentary review of approximately 170 government proposals is underway in mid-October 2018. According to the Government's plans, a further 120 government bills will be submitted to the Parliament during this electoral term, in the course of which they must also be approved. Small and technical amendments form a part of the aforementioned nearly 300 bills, but there is a multitude of government proposals with high interest to our corporate clients, such as the already delayed implementation of GDPR into Finnish legislation and all the amendments relating thereto. As the implementation of the EU's fifth money-laundering directive requires review by the Constitutional Law Committee, the aim to have it in force in the beginning of 2019 is also challenging. It is also worth to mention some other government proposals of significance, which have been recently submitted to the Parliament: proposal regarding amendments to energy taxation, which include stipulations on large-scale energy storages, and the reform of trademark legislation including amendments required in the EU trademark directive, which must be implemented already in January 2019. Even though legal information retrieval is a part of the basic skillset of every lawyer, the core duties of associates and attorneys working in a law firm do not include monitoring legislative processes. It is the expertise and focus on legal research that enables us legal knowledge management professionals to be of true value to our colleagues, who may then concentrate on their own legal expertise – and also on the business of our clients. Indeed, many of my colleagues have expressly shown their appreciation to our KM team's devotion on proactive follow-up of status and current contents of anticipated legislative amendments in the course of the past few months. It is fundamental for our clients to be aware of the forthcoming legislation in order to adjust their business accordingly, to ensure their continuing compliance and to stay on top of their game. Strategic legal advice is not only about the present, but also about the future. And although predicting the future seems to be harder than usual today, our continuous monitoring of legal developments and following-up on specific parliamentary proceedings in detail provides our lawyers the possibility to keep up with the anticipated amendments to legislation in their field of expertise. Effective legal knowledge management also makes it possible for both our lawyers and our clients to focus on what they do best: their core business.
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Government Proposal to implement EU's Fifth Anti-Money Laundering Directive in Finland
4 Oct 2018 The Finnish Government proposal implementing the provisions of EU's Fifth Anti-Money Laundering Directive (the "Fifth AML Directive") was submitted to the Parliament on 4 October 2018. The proposal includes, inter alia, amendments to the Anti-Money Laundering Act (the "AML Act") and enactment of two new acts. The objective is that the proposed legislation would enter into force on 1 January 2019. Only approximately one year after the AML Act entered into force in Finland, it will be amended due to the latest amendments to European anti-money laundering legislation. The amendments form part of the EU Commission's action plan on strengthening the fight against terrorist financing and must be implemented by the Member States by 10 January 2020. Our observations of the proposed key amendments to the current legislation are set out below. In summary, the Fifth AML Directive significantly limits anonymity in the financial sector and tackles money laundering and terrorist financing in new ways. Continuous compliance efforts are therefore needed from both current and new reporting entities under the AML Act. Key Observations 1. Extension of the Scope of the AML Act to Crypto Market Crypto currencies or virtual currencies are currently not explicitly regulated by Finnish law and they are not considered to be payment instruments under the payment service legislation. The proposed amendments will both define virtual currencies for the first time under Finnish law and also set specific requirements for those providing services related them. The scope of the AML Act would be extended to cover custodian wallet providers and providers engaged in exchange services between virtual currencies and fiat currencies. This means that, in the future, all crypto exchanges and all providers of electronic wallets for virtual currencies such as bitcoin would be covered by the AML Act. These platforms and providers would be required to register with the Finnish Financial Supervisory Authority and they would have to meet the requirements of the AML Act including the same responsibilities as other reporting entities, such as monitoring transactions and implementing customer due diligence. Additionally, a new Act on the Providers of Virtual Currencies (FI: Laki virtuaalivaluuttojen tarjoajista) is being proposed. The scope of the Act would cover also issuers of virtual currencies, although in many occasions the identity of such is not known. The scope of the AML Act would further be extended to cover e.g. art dealers (with respect to transactions where the value amounts to 10,000 euros or more) and all forms of tax advisory services. 2. Beneficial Ownership Information Registers of beneficial ownership information required under the current AML Act will come into effect as planned. Accordingly, all legal persons, excluding listed companies, are required to keep information on their beneficial owners as of 1 January 2019 and enter beneficial owners to the registers maintained by the Finnish Patent and Registration Office by 1 July 2020. In addition, reporting entities and competent authorities would have to notify the holder of the registers of discrepancies found between the beneficial ownership information on the registers and the beneficial ownership information they hold otherwise. Furthermore, beneficial owners would have an obligation to provide the respective companies with their beneficial ownership information required for the registers. 3. Politically Exposed Persons Politically exposed persons (PEPs) continue to be high risk for the purposes of the Know Your Customer (KYC) procedures and require enhanced due diligence. In order to enable reporting entities to better identify PEPs, offices and functions that qualify as politically exposed on national level including also nationally registered international organizations would be specified in a separate Government Decree. 4. High-Risk Third Countries According to the proposed amendments to the AML Act, reporting entities would be required to implement enhanced due diligence measures to monitor suspicious transactions involving high-risk countries more strictly. This includes, inter alia, obtaining information on details regarding the nature of the relationship, the origin of the transferred funds and the business partner’s motivation to liaise. Additionally, the reporting entity’s higher management would be required to give consent to the business relationship. Also existing business relationships would be strictly monitored. According to the proposal, the Finnish Financial Supervisory Authority would be given further authority in the subject matter, after which it may for example refuse reporting entities from high-risk third countries to establish themselves in Finland or prevent reporting entities from Finland to establish themselves in high-risk third countries. 5. Monitoring of Bank and Payment Accounts According to the Fifth AML Directive, Member States shall establish centralized automated mechanisms, such as central national registries or central electronic data retrieval systems, for bank and payment accounts to ensure the quick identification of all accounts of any individual by the financial intelligence units and competent authorities. In Finland, a new Act on the Bank and Payment Accounts Monitoring System (Fi: Laki pankki- ja maksutilien valvontajärjestelmästä) is being proposed to enable direct access to relevant account information by competent authorities. The centralized monitoring system would include both automated interfaces for information searches and a register maintained by the Finnish Customs. Credit institutions and their Finnish branches must establish an electronic data retrieval system that enables providing the information to the competent authorities without delay. Payment institutions, electronic money issuers, custodian wallet providers, providers engaged in exchange services between virtual currencies and fiat currencies and issuers of virtual currencies as well as their Finnish branches must provide information to the bank and payment accounts register. 6. Electronic Money Products Under the current AML Act, reporting entities may apply simplified due diligence measures with respect to e-money which meets certain conditions, including threshold amounts. The threshold for identifying holders of non-rechargeable prepaid cards would now be lowered from EUR 250 to EUR 150 per month. E-money online transactions with prepaid cards would be limited to EUR 50. 7. Going Forward As a main rule, the proposed amendments are intended to enter into force on 1 January 2019. The Government’s proposal (HE 167/2018 vp) is available here (only in Finnish). Developments on the European Union stage continue: the lawmaking procedure concerning proposal for a directive which would facilitate the use of financial and other information for the prevention, detection, investigation or prosecution of money laundering, associate predicate offences and terrorist financing is under way. Also further regulations relating to anti-money laundering are projected in the future. We are happy to discuss the implications of the proposed legislation as well as keep you updated on the legislative process. For more information and guidance, please contact the Head of our Corporate Advisory, Compliance & CSR practice group, Hanna-Mari Manninen.

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