Recent rulings from the Supreme Administrative Court

D&I Quarterly Q4/2015

Posted on

3 Nov

2015

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Dittmar & Indrenius > Insight > Recent rulings from the Supreme Administrative Court

The Supreme Administrative Court Ruling confirms the interpretation of the equity ratio exemption under the Finnish interest limitation rules. Under the equity ratio exemption, the interest limitation rule does not apply if the equity ratio of the debtor is equal to or higher than the equity ratio of the consolidated group.

The Supreme Administrative Court confirmed the advance ruling (24.6.2015/1784) by the Central Tax Board according to which the equity ratio of the debtor was to be compared to the equity ratio in the consolidated financial statements of the foreign parent company as opposed to the Finnish subgroup parent company. This was the case even in a situation where the foreign parent company is not obligated to prepare consolidated financial statements pursuant to an exception under local law.

The comparison of equity ratios should primarily be made based on financial statements pursuant to IFRS. However, Finnish unlisted subsidiaries often prepare their financial statements pursuant to Finnish GAAP as opposed to IFRS. The financial statements of the foreign parent company may be drafted pursuant to IFRS or local GAAP. The differences in methods to determine the equity and the balance between Finnish and local GAAPs or IFRS may prove beneficial for equity ratio exemption purposes.

Two rulings from the Supreme Administrative Court clarify the right to deduct VAT for services related to the acquisition of shares

In the case KHO:2015:134 the holding company acquiring a new subsidiary was allowed to deduct VAT paid for e.g. due diligence services as general expences, due to the fact that the holding company itself carried out economic activities subject to VAT by providing management and IT-services to the group companies at the time of aqcuisition.

In the case KHO:2015:135 the holding company acquiring a new subsidiary was not allowed to deduct VAT paid for costs relating to the aqcuisition since the holding company did not carry out economic activities at the time of aqcuisition but rather acted merely as a passive owner. The fact that the holding company started to provide management services subject to VAT approximately one year after the aqcuisition was not deemed relevant.

The Supreme Administrative Court also stated, in accordance with CJEU legal praxis, that dividends and group contributions received by the holding company are not of relevance when calculating the amount of VAT deductible as general expences. CJEU has stated that VAT applies only to payments regarded as compensation for business transactions or economic activities and not to payments resulting from ownership, such as dividends and other proceeds from owned shares.

Certain proposed changes to tax rules

The government has proposed that the following amendments would be introduced as of 2016.

  • Capital losses would be deductible from all capital income, as now they are deductible only from capital gains on the year of sale and five following years.
  • Tax rates for capital income would be 30 % up to EUR 30.000 and 34 % on any exceeding amount.
  • The provisions regarding voluntary disclosure of evaded taxes will be adopted temporarily. Individuals and decedent’s estates may avoid criminal sanctions for tax fraud under certain conditions by reporting evaded income on their own initiative during the year 2016.

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