On 15 December 2021, the Supreme Administrative Court (“SAC”) published two landmark rulings on the use of debt push downs. In line with previous case law and tax practice, the SAC once again approved the use of debt push down in third party acquisitions whereas it deemed the debt push down in an intra-group reorganisation artificial and tax avoidance.
Acceptability of Acquisition Vehicle Debt Push Downs in Third Party Acquisitions Reconfirmed (SAC 2021:179)
The Tax Administration had challenged an acquisition structure in a third party acquisition of a Finnish target company. In the Share Purchase Agreement (“SPA”), the parties had agreed that the Swedish buyer may assign the rights and obligations under the SPA to its subsidiary. Between signing and closing, the buyer had established a Finnish acquisition company to which it assigned the SPA and, at closing, the newly established Finnish company acquired the shares in the target company. The acquisition was financed mainly with a shareholder loan. The Tax Administration claimed that the transfer of the SPA with the responsibility for the acquisition loan to the Finnish acquisition company was artificial and denied the deductibility of the acquisition loan interests as tax avoidance.
The SAC emphasised that the use of a holding company to acquire shares from third parties and financing the acquisition partly with intra-group loan has been accepted in case law and legislative materials. Any restrictions to the tax benefits arising from the use of a holding company need to be based on specific legislation and not the general anti-avoidance provision. According the SAC, the transfer of the SPA between signing and closing was merely a transfer of the right to purchase the shares and, despite the transfer of the SPA, the acquisition was still considered a transaction between third parties. Consequently, the arrangement was not considered tax avoidance and the interest expenses were tax deductible within the applicable interest limitation rules.
The SAC ordered the Tax Administration to compensate exceptionally high legal costs for the taxpayer since the structure was commonly used and accepted.
Debt Push Down Deemed Tax Avoidance in an Intra-group Reorganisation (SAC 2021:178)
The other decision concerned an intra-group reorganization. Danish parent company’s direct ownership in a Finnish operative company was converted into indirect ownership through new Finnish and Swedish holding companies within a relatively short time period. The intra-group transfers were done partly as contributions in kind and partly as sales of shares. The purchase prices were left outstanding as debts between the group companies. The Finnish group companies were able to utilise the Finnish group contribution regime, and, thus, effectively the internal interest expenses were used to offset the operational profits in Finland.
The SAC considered that there were no valid business reasons for the intra-group reorganisations and that the aim was to obtain a tax benefit from the interest deductions. The SAC ruled the reorganisations artificial and that the share deals did not corresponded to the actual nature or purpose of the matter. Further, the SAC stated that adding the interest expenses to the Finnish holding company’s taxable income does not restrict the freedom of establishment referred to in Article 49 TFEU as, based on ECJ case law, national restrictions on deducting interest paid to another Member State do not violate the freedom of establishment when wholly artificial arrangements are restricted. According to the SAC, ECJ’s recent ruling in Lexel case does not change the EUCJ’s established case law. As the SAC considered reorganisation artificial, all interest expenses related the reorganisation were deemed non-deductible.
Our Insights
In our view, both of these cases are broadly in line with the earlier Finnish case law and tax practice: while the debt push downs in third party transactions should be accepted, that may not be the case at all in purely intra-group arrangements. The SAC’s interpretation on the artificial nature of the intra-group debt push down, in particular in light of ECJ case law, seems very strict and it may result in further litigations for intra-group transactions.
We consider that by ordering the Tax Administration to compensate a relatively large amount of legal costs, the SAC seems to indicate that the Tax Administration had tried to unnecessarily challenge structures that have been accepted in third party acquisitions for decades. As such, the decision is a welcomed development in favour of taxpayers’ rights. In a wider context, this message should strengthen the legal certainty and the taxpayers’ ability to trust that the Tax Administration will not challenge commonly accepted structures and that any changes to their tax treatment should be established through legislation.
