The Draft Proposal

Ministry of Finance has issued a draft government proposal on limitations to the deductibility of interest expenses implementing the interest limitation rules of the Anti-Tax Avoidance Directive (2016/1164). The Directive, aiming to provide for a comprehensive framework for anti-abuse measures, contains rules also on exit taxation, a general anti-abuse rule, controlled foreign company rules and rules to tackle hybrid mismatches, which will be separately implemented to domestic legislation. The new interest deductibility limitation rules would enter into force at the beginning of 2019.

The new limitations to the deductibility of interest significantly expand the scope of the currently applicable limitation rules, affecting both tax payers and the economy.

Limitations to the Deductibility of Interest

Similarly as under the current rules, as a main rule, deductibility of net interest expenses would be limited to 25 % of EBITD (taxable business profit added with interest expenses, tax depreciations, and net group contributions).

The most significant changes compared to the currently applicable rules include:

• the limitations would also apply to interest paid to third parties, such as interest on bank loans;
• the general threshold of EUR 500.000 would still apply, but a new safe harbor threshold of EUR 3.000.000 would be introduced in relation to interest expenses on third party debt;
• the limitations would apply to all Finnish resident corporate taxpayers, including financial undertakings, and also companies not conducting a business that are excluded from the application of the current limitation rules;
• the so-called balance sheet test exemption would be abolished; and
• the definition of interest is broadened to cover a wide range of considerations, such as interest components of financial leases and guarantee fees.

Implications

Proposed amendments significantly expand the scope of application of the deduction limitation rules, which are suggested to apply to, inter alia, real estate companies and other non-business companies as well as companies operating in the financial and insurance sector.

The broadening of the definition of interest to cover a wide range of costs economically equivalent to interest expenses, such as financial leasing and guarantee fees will also broaden the scope of expenses potentially subject to deductibility limitations.

Furthermore, in addition to extending the applicability to third party debts, the definition of related parties is also tightened. Interest paid to parties with 25 % direct or indirect ownership or profit share would be treated as related, meaning that also interests paid to non-controlling shareholders might be subject to the EUR 500.000 threshold.

Among many sectors and structures affected, many private equity fund structures (e.g. including leveraged holding companies and profit participating loans) and real estate investment structures will be significantly impacted.

Even though the current draft government proposal is subject to changes, a significant part of the new rules are based on minimum requirements set by the Directive and will therefore remain in the final draft. Therefore the changes related to e.g. applicability of the rules to third party interests and to a wider range of corporate entities will enter into force.

The above mentioned changes would enter into force on 1 January 2019.

It is recommendable for companies to assess the impact of the proposed changes to their current financing structures. We are happy to discuss the proposed changes with you and keep you updated with the development of the legislative process.