The Supreme Administrative Court (“SAC”) issued a decision changing the status quo concerning transfer tax levied on purchases of shareholder loans in acquisitions. Under existing tax practice the shareholder loans transferred from the seller to the buyer in connection with the share purchase have been included in the transfer tax base, i.e. also the value of the shareholder loans has been subject to Finnish transfer tax.
The SAC took a strict position and ruled that such an interpretation did not fall within the wording of the Transfer Tax Act and therefore transfers of shareholder loans are not subject to transfer tax. Going forward, this fundamentally narrows the scope of transfer tax in share deals including shareholder loans.
Taxpayers should also evaluate their past transactions and reclaim any transfer tax paid in excess under the new position taken by the SAC. Transfer tax may be reclaimed for transactions concluded in 2014 or later.
Transfer Tax on Shareholder Loans
The appellant had purchased the shares as well as the shareholder loans (“SHLs”) in a company from two sellers under a single share purchase agreement (“SPA”). The purchase price paid for the shares and the SHLs was EUR 900,000 in total and no breakdown was provided for the allocation of purchase price between the shares and the SHLs in the SPA.
The purchaser had reported the purchase price for the shares as EUR 1 and EUR 899,999 as the purchase price paid for the transfer of SHLs. The Tax Administration had adjusted the transfer taxation and included full purchase price, including the considerations paid for SHLs, in the transfer tax base.
Transfer Tax Rate and Tax Base
Under the Transfer Tax Act, transfers of shares and securities are subject to transfer tax of 1.6% (2% for real estate companies, including real estate holding companies and housing companies).
The tax base on transfers of securities includes:
- the purchase price and other consideration paid for the transferred securities;
- considerations paid to other recipients than the seller, where the consideration has been a condition of the purchase agreement; and
- obligations undertaken by the purchaser towards the seller or another party, provided that the obligation is for the benefit of the seller.
The Tax Administration and the Administrative Courts have previously deemed that purchases of shareholder loans are included in the tax base and subject to transfer tax.
The SAC decided, after a 4-1 vote, that the purchase price paid for the SHLs does not fall into any of the above three categories. Therefore, the purchase price of the SHLs cannot be included in the transfer tax base as such an interpretation is not supported by the wording of the law.
Further, the SAC noted that even though the preparatory works of the Transfer Tax Act included an example concerning a similar scenario and in detail described the intended purpose of the rules concerning the transfer tax base, the preparatory works may not expand the scope provided by wording of the Transfer Tax Act.
As the nominal value of the SHLs exceeded the total purchase price paid for the shares and the SHLs, the SAC accepted allocating the purchase price almost fully to the SHLs in accordance with the filed transfer tax return.
We recommend reviewing past Finnish transactions in order to identify opportunities for reclaiming any transfer taxes paid for transfers of SHLs. Transfer taxes paid in excess may be reclaimed for transactions concluded in 2014 or later. Companies are encouraged to file refund claims promptly.
Going forward, purchasing the SHLs directly from the seller will typically result in lower transfer tax bases compared to refinancing the SHLs.
In general, this ruling may also be seen as a strong legalistic position taken by the SAC, which may have bearing in other cases, particularly those involving self-assessed taxes.
We are happy to discuss the topic in more detail so please do not hesitate to contact us.