Tax implications arising from the Corona situation

D&I Quarterly Q2/2020

Posted on

27 May


D&I Quarterly

D&I Quarterly Q2/2020 brings together a selection of our experts’ articles published on our digital magazine Quarterly and here on D&I Insight.

Please be informed that all coronavirus –related articles will be regularly updated in our D&I Hub for COVID-19.

Dittmar & Indrenius > Insight > Tax implications arising from the Corona situation

While the corona situation is causing severe issues on various fronts, the economic downturn and decrease in valuation levels are triggering a variety of tax questions relating not only to the realisation of losses, but also tax opportunities for new investments and intra-group restructurings. In day-to-day operations cash is king. As many companies are facing liquidity issues, we will also look into the possibilities provided by Finnish Tax legislation for optimising cash positions.

Tax implications relating to transactions

Risks and opportunities

The economic downturn is, without a doubt, expected to have dramatic effects on the M&A market, at least in the short to medium term. Unfortunately, investors will be faced with situations where companies are encountering liquidity issues or are heading towards non-compliance with their financing arrangements. This may result in investment opportunities in stressed assets becoming available as well as potential pre-packed restructuring deals and enforcement sales. These scenarios involve both risks and opportunities, also from a tax perspective, and warrant a detailed case by case analysis.

“The economic downturn is, without a doubt, expected to have dramatic effects on the M&A market.”

Under Finnish tax rules, private equity investors and industrial and other non-private equity investors are treated differently under the participation exemption rules. Provided certain criteria are met, capital gains on fixed asset shares are tax exempt and capital losses are not tax deductible for industrial and other non-private equity investors. For private equity investors, on the other hand, corresponding gains are taxable and losses deductible. Further, Finnish tax rules contain provisions relating to the deductibility, for industrial and other non-private equity investors, of losses on debt receivables whereas decline in value of receivables from affiliated companies are not tax deductible. This rule is meant to prevent the circumvention by industrial and other non-private equity investors of the non-deductibility of capital losses on shares covered by the participation exemption. The rules are, however, asymmetrical to a certain extent. For example, the non-deductibility of losses on receivables applies also in relation to real estate companies that are not covered by the participation exemption. On the other hand, for example in connection with distressed sales where debt receivables are acquired below par value, gains may be realised on receivables and such gains are not covered by the participation exemption. As illustrated by these simplified examples, whether gains or losses are realised on debt or equity instruments may have a material tax impact. We recommend that especially industrial and other non-private equity investors analyse well in advance their position and alternatives including e.g. debt to equity conversions.

Time to consider assets deals?

In stressed and distressed transactions, capital losses may not be deductible for industrial and other non-private equity sellers in share deals. This may lead to asset deals becoming more popular, especially if lower asset valuations limit potential taxable gains and the target company can utilise its tax losses.

Ensuring cash repatriation

Traditional liquidity-based structures, which often entail the use of group contributions, may face challenges with cash repatriation in case of lack of distributable funds and/or solvency issues. Purchasing receivables from the seller may provide for additional cash repatriation opportunities.

What a multinational group should take into consideration

Transfer pricing models

In centralised transfer pricing models, the decreased profitability and losses realise in the principal company, whereas the limited risk entities should be entitled to low and steady profits. In the current situation, groups operating in centralised models should review the need to adjust the comparables to correctly reflect the market situation in 2020 as well as identify the entity or entities which should bear the exceptional costs arising from the pandemic.

In de-centralised models, the losses realise throughout the group in accordance with the existing intra-group pricing principles. It is important to prepare sufficient documentation on the reasons for the losses to support the arm’s length pricing of the intra-group transactions and assess how any exceptional costs should be borne at arm’s length.

In connection with the review of the current transfer pricing model, it would also be a good time to review how such unanticipated circumstances and costs are taken into account in the transfer pricing model and intra-group agreements in general and whether changes or adjustments are needed.

Intra-group financing

The economic downturn may also lead to increased need for intra-group financing. The arm’s length terms and conditions for new intra-group financing would need to be determined taking into account the current market conditions. The existing intra-group financing would also need to be reviewed in light of the terms and conditions of the intra-group agreements, in particular covenants, taking into consideration the changes in the borrower’s business.

The OECD has recently published detailed guidance on the transfer pricing of financial transactions. The guidance discusses questions relevant for pricing of intra-group financing and, i.a., when a loan covenant should be deemed to exist despite a lack of written agreement. However, the Finnish legislation and case law limits the applicability of the guidance, in particular, where the application of the guidance would lead to, e.g., re-characterisation of the intra-group loan into equity or re-allocation of debt, or other type of re-characterisation of transactions, based on the arm’s length principle. In Finland, the Tax Administration should respect the legal form of the intra-group transaction also during exceptional economic hardship.

Income tax treaties

The changes in business and ways of working may also lead to questions on the correct application of income tax treaties and related domestic legislation. These questions have even more relevance if the different lock-down orders and recommendations continue for a longer period or if, e.g., remote working becomes increasingly popular after the pandemic.

Possible implications include creation of permanent establishments due to the physical location of the remotely working employees, as well as effects on the employee’s tax status. According to the OECD, it should be unlikely that the ongoing pandemic would lead to such implications. The Finnish Tax Administration has issued very limited guidance on these questions and the starting point is that the situation is assessed based on the normal rules and guidance. Even though temporary changes should not usually trigger changes in the taxation status, a review of possible risk areas is nevertheless recommended.

“The economic downturn and decrease in valuation levels can also be a good time to carry out contemplated intra-group restructurings.”


Despite the obvious and serious challenges, the economic downturn and decrease in valuation levels can also be a good time to carry out contemplated intra-group restructurings; e.g., the value of intangible assets or business functions may have significantly decreased and the arm’s length consideration would thus be lower. Diligent documentation and analysis are essential for successfully seizing the opportunities. Pre-emptive discussions with the relevant tax administrations, or other means of securing the tax treatment beforehand, should also be considered.

Managing liquidity

Corporate income tax

First, the corporate income tax prepayments paid during 2019 can be compared to the 2019 tax return, which should be completed by the end of May. If the 2019 prepayments exceed the tax liability shown on the tax return, it is possible to request a refund already now, instead of waiting for the tax assessment decision, which could be as late as October 2020.

Second, with respect to 2020 prepayment instalments (which most companies pay monthly), you can apply to adjust the amounts to reflect the most recent income estimates for 2020, which unfortunately are a lot grimmer for many taxpayers than in the beginning of the year. If the prepayments have already been paid in excess of the estimated total annual tax liability for 2020, the Tax Administration will issue a refund.

Payment arrangements

If the company is already having difficulties in making its tax payments, it could seek to apply for a payment arrangement, available on eased conditions, as discussed in our D&I Quarterly Q1 2020.

Value added tax

With respect to VAT, companies may, as part of the payment arrangement with eased conditions, seek to reborrow the VAT payments made which had their due dates between January and March 2020. The reimbursement would provide an increase in the cash flows but finally the amount must be paid back within two years (if no security is provided) and with interest of 3 per cent.

Further, there are some possibilities to fine tune the cash flow efficiency of the invoicing process. Invoices that would normally be issued during the last days of the month could instead be issued on the first day of the following month, providing for an extra month to pay the VAT. The deduction for input VAT is available already at the time of purchase, ahead of the receipt of invoice, which can be used to expedite VAT recovery and enhance a company’s cash position.

Intra-group aspects

Many groups are also evaluating the possibilities to repatriate cash from their subsidiaries. Repatriating funds from Finland may be possible without tax leakage, as Finnish tax legislation and tax treaties often provide a possibility to distribute dividends or capital to parent companies without withholding tax. However, it is important to note that in Finland the solvency of the company and any essential changes in its financial position after the completion of the financial statements, have to be considered. Thus even if the 31 December 2019 financials would enable repatriation of funds, careful consideration should be given to the impacts of the pandemic.

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