Tax Breakfast

Government Proposal on New Interest Limitation Rules in Finland

Event date

2 Oct

2018

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Hallitus on 27.9.2018 antanut hallituksen esityksen uusista korkovähennysrajoituksista. Uusi lainsäädäntö rajoittaa korkojen vähennyskelpoisuutta merkittävästi nykyisiä sääntöjä laajemmin tuomalla mm. pankkilainojen korot rajoitusten piiriin. Uudet säännöt soveltuvat jo verovuoden 2019 verotuksessa.

D&I:n veroaamiaisella käsittelemme hallituksen esityksen sisältöä ja sen vaikutuksia tuoreeltaan. Keskitymme erityisesti uusien sääntöjen soveltumiseen konsernirahoitukseen, yrityskauppojen rahoitusrakenteisiin sekä kiinteistösijoitusrakenteisiin.

Olemme myös julkaisseet oheisen D&I Alertin, jossa käsittelemme hallituksen esityksen sisältöä tarkemmin.

 

Lisätiedot: [email protected]

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Government Proposal on New Interest Limitation Rules in Finland
27 Sep 2018 First Step for Implementation of the EU's Anti-Tax Avoidance Directive The Finnish Government has today issued a government proposal on new limitations to the deductibility of interest expenses implementing the interest limitation rules of the EU's Anti-Tax Avoidance Directive (2016/1164). Compared to the draft government proposal which was published in January this year, the new proposal is in some aspects more lenient and addresses some of the concerns raised earlier in public consultation. The most significant changes are the introduction of the so-called grandfathering rule as well as the re-introduction of the current balance sheet exemption and a financial industry exemption. Nevertheless, the new interest limitations significantly expand the scope of the currently applicable rules. Additionally, many uncertainties remain with respect to the interpretation and the exact implications of the newly proposed rules. Limitations to the Deductibility of Interest The proposed rules expand the scope of application to cover both new types of taxpayers and a wider range of interest payments. The key characteristics of the new limitation rules can be summarized as follows: The deductibility of net interest expenses would remain generally limited to 25% of EBITD (taxable business profit added with interest expenses, tax depreciations, and net group contributions); 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 net interest expenses on third party debt; the definition of interest is broadened to cover considerations such as guarantee fees; the limitations would also apply to interest paid to third parties, such as interest on bank loans; the limitations would apply to all Finnish resident corporate taxpayers, and also companies taxed under the Income Tax Act, such as real estate companies, that are excluded from the application of the current limitation rules; however, the new rules include a grandfathering rule that excludes third party loans concluded before 17 June 2016 from the scope of application; the exclusion available for financial institutions; and the current balance sheet test exemption remains. Implications The new rules will indirectly increase the cost of debt and therefore impact both business considerations and market practices. New Taxpayers and Structures Covered Groups with centralized external financing may also face new challenges with interest deductibility (e.g. publicly listed parent company bonds). Private equity structures (e.g. including leveraged holding companies and profit participating loans) and real estate investments are among those most significantly impacted by the expansion of the scope of applicability. The new rules are suggested to apply to, inter alia, real estate companies and other non-business companies. Definition of Interest The definition of interest is widened. The new definition covers costs economically equivalent to interest expenses such as guarantee fees. However, according to the government proposal e.g. financial leases are not considered to fall under the new definition of interest, contrary to the draft government proposal. The Grandfathering Rule The exemption of third party loans concluded before 17 June 2016 is welcomed, but raises questions with respect to its interpretation, as the exemption would not apply to any "subsequent modification" of such loans. The potential impact of refinancing activities and other changes to loan terms performed on 17 June 2016 or later should be evaluated in order to determine whether the grandfathering rule would apply. The implications of the grandfathering rule should also be considered in connection with any future modifications of loans or refinancings since those may in some cases significantly increase the indirect costs for refinancing. The grandfathering rule would also apply to interests capitalized in taxation before 1 January 2019. Applicability of the New Rules Parliament is expected to decide on the government proposal later this year. Major changes to the proposed rules are not anticipated. The proposed new rules would be applied already for the tax year 2019 i.e. financial periods ending during 2019. It is recommendable for companies and investors to assess the impact of the new rules to their current financing structures. Since the new rules will be applicable very shortly, and for some companies the rules already apply to the ongoing tax year, we recommend that this assessment is made as soon as possible. We are happy to discuss the proposed changes with you.
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Draft Government Proposal on International Tax Dispute Resolution Mechanisms
29 Aug 2018 The Ministry of Finance of Finland has issued a draft government proposal on international tax dispute resolution mechanisms on 27 August 2018. The draft proposal implements the Directive on Tax Dispute Resolution Mechanisms in the European Union (2017/1852, the "Directive"). In addition, the proposed new legislation addresses certain other tax dispute resolution mechanisms related to the interpretation of tax treaties. The aim of the new legislation is to enhance the resolving of international tax disputes and to avoid double taxation in cross-border context. Summary of the Proposed Tax Dispute Resolution Mechanisms The following table illustrates the main changes to the current processes and contents of the draft proposal on a high level.   Timing of the Legislative Process The draft proposal is currently under public consultation. The contents of the proposal are therefore subject to change. The new legislation is proposed to apply to applications filed on 1 July 2019 or thereafter which concern tax years started on 1 January 2018 or later. However, part of the new legislation, such as the obligation to choose between the tax dispute resolution mechanisms and the domestic appeal process, is applicable to all applications filed on 1 July 2019 or thereafter. Reflections on the Draft Government Proposal Many of the proposed changes provide long-awaited procedural rules for tax disputes relating to the interpretation of tax treaties. Currently, most of the relevant procedural provisions are outdated and not explicitly applicable to international tax dispute resolution processes. Implementation of the Directive provides more effective means for taxpayers to eliminate double taxation between EU countries since the threat of binding arbitration can be expected to encourage the competent authorities to negotiate, and ultimately double taxation should be eliminated through arbitration. This type of process is currently only applied in transfer pricing disputes involving EU countries. The draft proposal also includes certain changes to the current processes which can in many cases limit the taxpayers' legal remedies. The taxpayers would in practice need to choose whether to refer the case to a tax dispute resolution process under the proposed legislation or the domestic appeal process. This would increase the importance of the strategic decisions taken during a tax audit phase regarding potentially threatening cross-border tax disputes. Since this provision is proposed to apply to all applications filed on 1 July 2019 or thereafter, regardless of the tax year the application covers, the draft proposal may have great relevance in many of the cross-border tax disputes pending today. One aspect which the draft proposal seems to ignore is the extension of the suspension of tax enforcement to the tax dispute resolution processes under the proposed legislation. Currently, it is possible to request the temporary postponement of the payment of taxes only during domestic appeal processes. If this discrepancy is not fixed, it may render the use of tax dispute resolution mechanisms a less attractive alternative in many cases. We are happy to discuss the implications of the proposed legislation in concrete situations as well as keep you updated on the legislative process.

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