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   New developments in the drafting of the Unshell Directive (ATAD III): EU is setting minimum requirements for the tax advantages of shell companies

   The purpose of the Unshell Directive is to impose minimum substance requirements that companies located in the EU must fulfil in order to be entitled to the tax advantages granted through tax treaties and EU directives. The directive aims to prevent tax avoidance and tax evasion practices that directly affect the functioning of the EU’s internal market. The regulation is meant to prevent situations where companies that are located in the EU but have no or minimal economic activity (i.e. holding companies or shell companies) can benefit from tax advantages particularly by eroding the tax base of another Member State.  The regulation imposes new reporting obligations to companies. The regulation is expected to have significant effects on cross-border investment structures, and it can create pressure to amend existing group structures. The Unshell Directive is intended to enter into force in the beginning of next year, and companies should already at this stage consider how the draft directive could affect their business. Determining which companies are in the scope of the regulation (gateway test) The Unshell Directive would be applied to all companies that are considered tax resident and are eligible to receive a tax residency certificate in a Member State. This means that the directive would not be applied to companies outside of the EU. The scope of the Unshell Directive is to be limited to companies that are at risk of being found to lack minimal substance and used with the main objective of obtaining a tax advantage. The directive is applied to companies that fulfil the following cumulative three-part gateway test. At the preparatory stage the proposed regulation has been criticised for extending the scope of the assessment criteria to start retrospectively two years before the entry into force of the regulation. Retrospective regulation is generally problematic in terms of tax certainty and the predictability of taxation. Actors automatically excluded from the scope of the regulation Certain actors have been excluded from the scope of the directive. The regulation would not apply to certain listed companies, regulated financial companies and domestic holding companies specified in more detail in the directive. For example, the regulation would not apply to investment funds under the UCITS Directive and alternative investment funds referred to in the AIFM Directive. Limitations to the scope of application would be assessed on a company-specific basis and not on a group-specific basis. In practice this means that the Unshell Directive may be applicable, for example, to investment structures where holding companies owned directly or indirectly by a regulated financial company are within the scope of the Unshell Directive. Actors in the investment industry have proposed at the preparatory stage of the regulation that such investment structures would be more extensively excluded from the scope of application, but at least for now no such amendments have been made. Indicators of minimum substance for tax purposes Companies within the scope of the regulation must declare in their annual tax return, for each tax year, whether they meet the indicators of minimum substance. If a company declares with its tax return that it fulfils all the indicators of minimum substance stated below, it is presumed to have minimum substance for the tax year. If the company does not fulfil the indicators of minimum substance, it is presumed to be a shell for the purposes of the directive.  The indicators of minimum substance: The indicators of minimum substance proposed in the draft directive are partially very much open to interpretation, and their application will likely be challenging. A particularly ambiguous requirement is the one that states that the majority of the full-time equivalent employees of the company must have their habitual residence as set out in Rome I Regulation in the Member State of the company, or be at no greater distance from that Member States insofar as such distance is compatible with the proper performance of their duties, and that such employees must be qualified to carry out the activities that generate relevant income for the company. It is unclear, for example, whether Finland and Sweden are close enough to each other that employees can properly perform their duties as referred to in the directive from their country of habitual residence. The regulation should also clarify which kinds of attributes or experience are required of the employees in order for them to be qualified to carry out the activities as referred to in the directive. Exemption for lack of tax motives Companies that are presumed to be shell companies based on their annual information can provide tax administrations with additional evidence of the business activities they perform to generate income and this way rebut the presumption of being a shell company. The tax administration can at this stage deem that the company is not presumed to be a shell company for the next five years, provided that the factual and legal circumstances concerning the company do not change during that time. To ensure tax certainty and equal implementation of taxation, the proposed regulation and the grounds for rebutting a presumption of being a shell company should be specified to make it clear which criteria are used as the basis of the assessment. It is likely that many actors in the investment industry will provide tax administrations with additional evidence of their business activities and request that the tax administrations rebut the presumption of being a shell concerning them, due to which it is extremely important that the assessment criteria are fair and predictable. Tax treatment of shell companies If a company is deemed to be a shell company as referred to in the directive, it is not entitled to the tax advantages of tax treaties and EU directives. In practice this means that the company is not entitled, for example, to exemption from withholding tax concerning dividends, interests or royalties. If the shareholders of the shell company reside in another Member State, the shell company’s passive income will be taxed in accordance with national legislation as if the income were directly generated for or paid to the shareholders of the shell company. If the company does not have minimum substance for tax purposes, the Member State where the company is resident for tax purposes must deny to issue a certificate of tax residence to the company for use outside the jurisdiction of the Member State. The directive would not be applied to third countries. The allocation of taxing rights affects only Member States. In practice, however, situations involving third countries are likely to arise, for example where income from a third country flows to the shell or where the shareholders of the shell are in a third country or where the shell owns assets situated in a third country. In these cases, agreements for the avoidance of double taxation between a Member State and a third country should be complied with as regards allocation of taxing rights. In the absence of such an agreement between the countries, the Member State involved should apply its national law. Sanctions for violating the regulation The Member States must lay down administrative sanctions for companies if they do not comply with the reporting obligations of the Unshell Directive. The directive would set the lower limits for the amount of sanctions in different situations, and adhering to the limits, the Member States must lay down administrative sanctions for companies for violations. As the directive would allow the Member States to decide the amount of administrative sanctions, it is likely that sanctions in different Member States will significantly deviate from each other. Effects of the Unshell Directive in practice The planned regulation would have a significant effect at least on the international investment structures of actors in the investment industry. In particular in private equity, it is common to use holding companies to enable smooth financing of investment objects for institutional investors as well as adequate management of investment objects, among other things. In practice, holding companies are used in investment structures, for example, in managing securities and arranging the order of priority for financing. Such holding companies used in investment structures may be relatively passive for long periods of time due to the nature of the investment objects. Holding companies may become more active for example when the financing structure of the investment objects is changed or when the investment objects are sold or new objects are acquired. The proposed regulation may pose challenges in the investment structures of such operators, and as described above, it is possible that some companies in the investment structure will in future be considered shell companies that are refused some tax advantages. It is also possible that the regulation leads to premature exits in cases where private equity undertakings decide to change their investment structures as a result of the Unshell Directive. With the directive, tax administrations in the Member States will receive more information on the operations of companies due to the reporting obligations included in the directive. The result may be that the Member States conduct more international tax audits in future. It is probable that the Unshell Directive will change the nature of holding companies and that in the future much more business, personnel and other resources will be centralised to holding companies. Some companies may concentrate their entire business to low tax countries as a result of the regulation. In the long term, the directive could also have more far-reaching effects, and holding companies and holding company structures like the current ones may in practice disappear from the market in the future. The Unshell Directive may have negative impacts on the competitiveness of the European Union in the global market. Next phases in the regulation process The Unshell Directive is next referred to the Council for adoption. The Council does not have to adopt the directive in the form adopted by the Parliament, but it can still amend the directive. After the Council has adopted the directive, the Member States can start implementing it nationally. Pursuant to the draft directive, the Member States should issue national regulation implementing the directive by 30 June 2023, and the directive is intended to be applied as of 1 January 2024. The national laws should thus be drafted within a very short timetable.  It is important that the taxpayers already prepare for the upcoming regulation and assess how it could affect their business. We would be happy to discuss the planned regulation and its potential effects in more detail with you.

   Published: 15.3.2023

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   The Unified Patent Court will start operations on 1 June 2023

   Towards a unified European patent system The Unified Patent Court will be the patent court common to all EU member states that have ratified the UPC Agreement. The Unified Patent Court will have exclusive jurisdiction over unitary patents, European patents, supplementary protection certificates of European patents and European patent applications, unless the opt-out mechanism described below is used. The Unified Patent Court will not have any jurisdiction over national patents or supplementary protection certificates granted to national patents. In Finland, the Market Court will still have jurisdiction over national Finnish patents and supplementary protection certificates granted for national Finnish patents in the future as well. The unitary patent is a new, supranational option for patent protection in Europe. Currently, a European patent must be validated separately in each contracting state where patent protection is desired. This means in practice that a patent holder has a bundle of national patents. A unitary patent will only consist of a one single patent providing patent protection in the EU member states that have ratified the UPC Agreement. Opt-out possibility began on 1 March 2023 All European patents, supplementary protection certificates of European patents and European patent applications will be transferred under jurisdiction of the Unified Patent Court in the beginning of June, unless they are specifically excluded from the Unified Patent Court’s jurisdiction by using the opt-out mechanism. It is possible to use the opt-out even before the UPC Agreement enters into force during the three-month sunrise period which started on 1 March 2023. After the sunrise period, opt-out is possible during the seven-year transitional period. However, an opt-out can only be used ifno action has already been brought before the Unified Patent Court with respect to the European patent in question. It is highly recommended that companies start reviewing their patent portfolios now at the latest in order to exclude their patents from the Unified Patent Court’s jurisdiction during the sunrise period if considered necessary.

   Published: 15.3.2023

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   Temporary agency work – 5 things all employers should be aware of

   Check the applicable collective agreement Among other provisions on temporary agency work, many collective agreements include restrictions on the use of temporary agency work in covering peak periods or work that cannot be performed by the company’s own employees, for example. It is therefore important to review the provisions on temporary agency work of the applicable collective agreement on a case-by-case basis before deciding on the use of temporary agency work. Review the provisions on temporary agency work under the Employment Contracts Act Under the Employment Contracts Act, in temporary agency work, the right to direct and supervise the work is transferred to the user company together with the employer’s obligations directly related to the performance of the work and its arrangement. In order for the temporary agency to fulfil its own employer’s obligations, such as paying the proper wages, the user company has a legal obligation to provide the temporary agency worker’s employer with any and all information necessary for the fulfilment of these obligations. In light of the special characteristics of the arrangement, the user company and the temporary agency should outline the distribution of obligations as clearly as possible in the temporary agency work agreement. The Employment Contracts Act determines the applicable collective agreement and the minimum terms of employment for the temporary agency worker’s employment relationship. The Act also contains provisions that specifically govern temporary agency work, including the following: Ensure the occupational safety and health of temporary agency workers Even though temporary agency workers are not directly employed by the user company, the user company is still responsible for their occupational safety and health in accordance with the Occupational Safety and Health Act. Before the temporary agency work begins, the user company must define the required professional skills and the special characteristics of the work in sufficient detail. The user company must inform the temporary agency of these details, and the temporary agency then has to pass this information to the temporary agency worker and ensure that the worker has the adequate professional skills, experience and suitability for the work to be performed. The user company is also responsible for introducing the temporary agency worker to the work, the conditions at the workplace and the occupational health and safety measures, among other things. When necessary, the user company also has to familiarise the worker with occupational safety and health co-operation and communication and with the occupational health care arrangements. To the extent necessary, the user company must also notify occupational health care and the occupational safety and health representative at the workplace when temporary agency work begins. Account for the use of temporary agency work in co-operation processes The Act on Co-operation within Undertakings applies to all employers who regularly employ at least 20 employees. When the Act is applied, the employer is responsible, for example, for the following co-operation obligations with respect to temporary agency work: Procure the information and reports required under the Contractor’s Liability Act Before signing an agreement on using temporary agency workers, the user company must, as a rule, ensure that the temporary agency fulfils its legal obligations. In practice, this means procuring the information and reports required under the Contractor’s Liability Act (such as a Trade Register extract or equivalent information as well as information on tax payment and employer register status, the applicable collective agreement, and pension insurance premiums paid) from the temporary agency or the appropriate service provider. This blog was originally published as a HENRY guest blog .

   Published: 22.2.2023

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   Do we need data to promote diversity and equality?

   The Non-discrimination Act obligates employers of all sizes to promote equality in the workplace. For example, employers must develop their methods of choosing employees and ways of making decisions that concern employees. The measures taken to promote equality must be effective, appropriate and proportionate. As all development efforts, promoting diversity and equality must be based on information. In order to improve the rights of a particular group, the employer needs to know how many people in the work community belong to this group and how they feel their rights are being realised. However, these good intentions may be in conflict with data protection legislation. In Finland, the processing of personal data is regulated in particular by the EU’s GDPR, the Finnish Data Protection Act and the Act on the Protection of Privacy in Working Life which require that there are appropriate grounds for collecting personal data. The employer may only collect data that is necessary for the employment relationship or if an obligation to collect data is specifically provided for in law. An obligation that is general in nature – promoting equality, for example – does not, as such, give employers more powers as regards collecting data. Moreover, data that is important with respect to equality is often sensitive personal data, i.e. special categories of personal data which are strictly protected by the law. For example, processing data on a person’s health, origin or sexual orientation is generally prohibited. This applies even if the employee consents to the processing of the data. Nevertheless, information on diversity in the work community would help the employer plan effective and appropriate measures to promote equality. Untargeted measures may be ineffective: while they might help some people, they are not specifically targeted at any particular group. Anonymous data can be collected, but anonymity depends on the work community Data protection laws do not apply to anonymous data, but that does not mean that an employer can ask their employees to anonymously answer any and all questions in order to promote equality.  Anonymising data does not mean hiding the names of individuals but presenting the data in a manner by which the individuals cannot be identified. Nameless data is not anonymous if it defines the object too narrowly. For example, ‘male, aged 50–55, native language other than Finnish’ might be sufficient to identify the employee in some work communities. Even keeping score of employee groups on paper might be too specific. Statistics are typically anonymous. The law does not determine the minimum number of observations, but a general rule of thumb, which is not based on regulation, is five observations or units of data. For example, team-specific results are often not reported in personnel surveys if the team consists of fewer than five employees. Therefore, the possibilities for data collection depend on the work community and the aspect under examination. In a larger organisation, it may be possible to collect statistics on various aspects of diversity. Even in work communities of a few dozen people there are enough persons identifying as men and women to collect anonymous data based on gender. Building trust is always worth it While data collecting is very restricted, often the most important factor of promoting equality is an atmosphere of openness and trust. Employees should feel that they are welcome and valued regardless of whether or not their characteristics position them as members of the majority. Such an atmosphere also fosters better results and is therefore a positive driver for the employer’s business as well.

   Published: 15.2.2023

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   The ability to carry out complex transactions brings competitive advantage

   Regulatory control on transactions is increasing In addition to changes in the market conditions and the geopolitical operating environment, competition law regulation on transactions saw significant developments last year and in the beginning of this year, which will impact M&A in the future. At the turn of the year the turnover thresholds for merger control were lowered in Finland due to an amendment to the Competition Act. The amendment extends merger control to more transactions and smaller companies than before. At the same time, the authorities’ methods of investigation and theories of harm are also developing. In many countries, there has already been national legislation in force that allows national authorities under certain conditions to investigate transactions that fall below the national thresholds. It is also worth noting that the European General Court’s ruling in the case Illumina/Grail confirmed significant legal guidelines regarding the European Commission’s right, under Article 22 of the EU Merger Regulation, to also investigate mergers at the request of a national competition authority even if the thresholds in accordance with the EU’s or national competition law are not exceeded. Illumina plans to appeal the ruling. Nevertheless, the case emphasises the need to also assess the competitive effects of transactions and potential merger control in situations where the thresholds are not exceeded and the authorities would not have the power to investigate the transaction without a transfer request to the Commission. This January, a new EU decree entered into force which aims to address the distortions of competition in the European internal market caused by aid from non-EU countries. The decree will be applied starting from July. It will give the Commission extensive investigative powers and require a prior notification to the Commission for acquisitions that exceed specific turnover thresholds if the parties to the transaction have received significant financial aid from non-EU countries. The decree will impact approval processes particularly in large transactions whose parties are multinational companies. This being the case, questions concerning merger control will be assessed in more transactions in the future. In many countries, the process takes longer than before and the regulatory control on transactions is becoming stricter. Additionally, the development of authority practice and case law emphasises the need to prepare for the processes of competitive authorities irrespective of the thresholds, particularly in transactions in the technology and pharmaceuticals business. Foreign investments are also under increasing control In addition to competition law, the significance of authority processes concerning the monitoring of foreign direct investments (FDI) has increased markedly both in Finland and globally. This is evident, among other things, in the strong increase in the number of merger notifications and applications made to the Ministry of Economic Affairs and Employment in 2021–2022 as well in the increasingly common authority practice to grant conditional approvals. Conditional approvals were enabled by an amendment that entered into force at the end of 2020. The same trend is also evident in other European countries where regulation on acquisitions is being implemented or extended. More often, it is necessary to consider in a transaction whether it impacts the national interests of Finland or another country and whether it therefore requires an approval by the authorities in one or more countries. It is also likely that transactions are increasingly assessed in parallel authority processes: in merger control processes as well as in FDI notification processes. Carrying out transactions requires careful planning of authority processes To carry out a transaction in the increasingly uncertain and regulated operating environment requires more and more provision for changing circumstances in processes and agreements. Authority processes must also be prepared for carefully. Particularly cross-border transactions increasingly require more than one authority process. In challenging transactions, approvals for transaction may include conditions that must be reconciled in parallel authority processes – also when the authorities’ concerns relate to different markets or different regulatory objects. In such a case, preliminary investigations concerning authority approvals are key to making sure that the parties have a realistic view of the schedule and of how certain the transaction is as well as the ability to account for the associated risks in transaction agreements.  An experienced partner helps to avoid surprises in transactions Despite the weakened visibility and increased cautiousness, the changed operating environment offers new opportunities to many companies and private equity investors. Last year, several significant transactions between listed companies took place in the Finnish market, demonstrating that companies are able to adapt to the new market situation. There is still demand for transactions, and the transactions market tends to recover quickly from crises. As the regulatory environment becomes stricter, particularly cross-border transactions require more extensive knowledge of the authority processes and careful planning than before. With the right preparation and assistance from experienced partners, companies can avoid surprises in authority processes and carry out the most challenging transactions successfully. The ability to implement complex transactions effectively may give a significant competitive advantage to private equity investors and companies that are growing their operations through acquisitions. Ensuring a smooth and speedy approval process in the increasingly uncertain operating environment is more and more essential for both parties to the transaction.

   Published: 27.1.2023

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   The new Whistleblower Protection Act is approved – here’s how to prepare for investigating reports

   The Act is based on the EU Whistleblower Directive. It obligates large and medium-sized enterprises as well as public sector actors to establish an internal reporting channel through which the personnel, for example, can report suspected misconduct. We discussed the basis and scope of application of the Act as well as establishing a reporting channel in our earlier blog .  In this blog, we will focus on how companies should process the reports. Confidentiality and time limits for acknowledgement of receipt An organisation must acknowledge to the whistleblower that a report has been received within three days of receiving the report. It must also inform the whistleblower of the measures the report will lead to within three months of receiving the report. When providing this information to the whistleblower, the time and manner of reporting on measures must be evaluated on a case-by-case basis. In addition to the confidentiality obligations, any detriment to the internal enquiry or investigation, among other things, must be taken into account while also keeping the rights of the reported person in mind. The identity of the whistleblower, the reported person and any information from which their identity can be deduced must generally be kept confidential. However, this may be deviated from in the situations and in the manner referred to in the Act. Organisations must be familiar with the confidentiality and data protection obligations set forth in the Act and the deviations thereof in order to ensure that reports are processed and investigated in accordance with the confidentiality and data protection regulations. Investigating reports requires resources and expertise The person in charge of the investigation can spend a considerable amount of time on even a simple report: the more complex and extensive the report, the more time it takes to carry out a thorough investigation. Organisations should allocate sufficient resources for the investigation and assess in advance the situations in which external resources should be used in order to avoid bottlenecks. Insufficient resources may lead to a delay in the investigation. In a worst-case scenario, the whistleblower might become frustrated and report the issue through a reporting channel maintained by the authorities or even disclose the information publicly, in which case the organisation no longer has the opportunity to conduct an internal enquiry first. Resourcing consideration should also include ensuring sufficient expertise. The investigators should be well-versed in the regulatory environment with respect to the content of the report. In addition to applicable legislation, the organisation’s own internal guidelines are essential. Although the requirements set for expertise vary and are dependent on the content of any individual report, organisations should consider in advance what expertise they have internally and where they can find the expertise they lack in specific cases. The key here is to consider these matters before adopting a reporting channel.  Plan the investigation process in advance An effective and reliable internal investigation process requires clear rules. Organisations should analyse the investigation process by way of its main stages and draft a clear description of the process in advance, all the way from the pre-investigation stage to reporting and decision-making. The process description should be flexible enough to adapt to investigating various issues but also sufficiently detailed and practical to be of use for the investigators. The process plan should also account for the documentation of the different stages and the investigation measures, so that in the event of a follow-up inspection, the measures taken and the grounds for the results of the investigation are clear. The practical aspects of planning may include drafting task-specific checklists, for example.  It may not be possible to estimate the extent of an investigation at the early stages, which is why the initial practical measures are often quite similar. On the other hand, any errors made at an early stage may affect the integrity of the entire investigation and the credibility of its conclusions. It may be impossible to correct these at the later stages of the investigation if the errors concern, for example, securing the material subject to the investigation or ensuring the integrity of said material. Checklists significantly decrease the risk of crucial measures not being taken or being taken too late. 

   Published: 24.1.2023

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   Capital gains tax on real estate, interest deduction limitations and support for household electricity bills – a lot going on in taxation

   On 17 November 2022 the Ministry of Finance published government proposal HE 279/2022, which proposes that the Income Tax Act be amended so that income acquired by indirect disposal of immovable property would in future be deemed income received from Finland. For example, income received from the sale of shares in a foreign company that owns immovable property in Finland through another company would be subject to tax in Finland after the amendment. The amendment would make it possible for Finland, as regards the most recent tax treaties, to use the power to levy taxes in indirect real estate disposals as the state in which the immovable property is located. The Government proposes amending section 10 of the Income Tax Act in such a way that profit received from indirect disposal of immovable property is also considered income received from Finland. After the amendment, profit from disposal of shares in a foreign real estate holding company and from disposal of units in a limited partnership investing in real estate would also be considered income received from Finland. In addition, profit received from disposal of assets managed for the benefit of another person would in future be income received from Finland. The government proposal estimates that the impact of the amendment on tax income is incidental and depends on whether the immovable property owned indirectly in Finland is sold and which tax treaty is applied to the disposal. Approximately half of the tax treaties made by Finland are in line with the old model and do not allow for the taxation of indirect disposal of real estate. These tax treaty countries include the Netherlands, Belgium, Austria, Luxembourg and France. In addition, applying the power to levy taxes requires that the seller cannot be considered to have the same status as a tax-exempt operator in Finland. In connection with the amendment, it is also intended to withdraw the reservation made to the Multilateral Instrument. Withdrawing the reservation would allow for supplementing some of the old tax treaties with the right to levy taxes on income received from indirect disposal of real estate, similarly to the current OECD model, without bilateral tax treaty negotiations. Parliament is currently reviewing the government proposal, and the act is intended to enter into force in the spring of 2023. Interest deduction limitations amended again – changes to balance sheet exemption and the derogation concerning infrastructure projects Interest deduction limitations were amended as of the beginning of 2023. The Government approved government proposal HE 202/2022 concerning the amendment of interest deduction limitations in November. The amendment tightens the requirements that the current act sets out for receiving balance sheet exemption based on balance sheet comparison and widens the scope of application of the derogation concerning infrastructure projects. In future, the amount of paid interest as well as the application requirements for balance sheet exemption that is based on balance sheet comparison affect the application of the derogation. The balance sheet exemption will not be applied in future if the amount of interest paid to parties that own a significant shareholding in a group company is at least 20% of all interest paid outside the group. In addition, the provision on limitations of deductibility was amended in such a way that a privately owned entity that is carrying out a long-term public infrastructure project ordered by a public body may in future deduct non-deductible net interest expenses paid to parties outside the sphere of interest. The purpose of the amendments is to limit opportunities to transfer income beyond the reach of Finnish taxation by using the derogation based on balance sheet comparison in private equity investment and other corresponding structures. The amendments are in line with the entry in the Government Programme about assessing whether the current regulations on interest deduction limitations and tax evasion are sufficient to prevent transferring taxable income beyond the reach of Finnish taxation, for example, in private equity structures. For long-term public infrastructure projects, the goal of the proposal is to prevent the application of the general interest deduction limitation provision to infrastructure projects that have been ordered by public bodies and are carried out in part or in full by privately owned entities. The purpose is to ensure that any tax burden caused by the interest deduction limitations would not fall on the implementation of socially important infrastructure projects financed from taxation. The amendments do not concern the deduction limitations for interest paid by such entities to their related companies. This kind of interest is still subject to the interest deduction limitations. The derogation concerning long-term public infrastructure projects only applies to interest paid to third parties and the related companies of any public body owners. The derogation based on balance sheet comparison will be first applied to the taxation for the year 2023. The derogation concerning public infrastructure projects will be applied retrospectively starting from the taxation for the year 2019. State supports households in electricity bills The Government announced in the fall that it will implement support measures to help households that receive large electricity bills. These support measures include a reduction in the VAT rate applied to electricity, granting households tax credit for electricity expenses and implementing electricity assistance for people on low incomes. All three measures will be temporary. The VAT rate applied to electricity is temporarily reduced from the general rate of 24% to the reduced rate of 10%. The temporary reduction to the VAT rate is in force from 1 December 2022 to 30 April 2023. The reduction does not apply to the price for electricity transmission or the VAT concerning electricity tax. In addition, a temporary tax credit for household electricity expenses (tax credit for electricity) is implemented starting from the beginning of 2023. In practice, the tax credit for electricity means that electricity expenses of a permanent residence temporarily entitle to a 60% tax credit to the extent that the paid amount exceeds EUR 2,000 and is at most EUR 6,000 from the period of 1 January 2023 to 30 April 2023. Maximum credit is EUR 2,400 per 1 permanent residence. The tax credit for electricity does not affect the amount of credit granted based on other household expenses entitling to tax credit. The part of the electricity bill that entitles to the credit is the price of electricity with VAT and the basic monthly charge. No tax credit is available for the cost of electricity transmission. The Government has not proposed any other amendments to the tax credit for household expenses. Since the price of electricity has increased dramatically and according to estimates will continue to increase, it has been decided to separately support low-income households that cannot use the tax credit for electricity granted by the Finnish Tax Administration. This assistance can be received for the period of January–April in 2023. The assistance is paid for the electricity expenses of a permanent residence and equals 60% of the part of a monthly electricity bill that exceeds EUR 400. When granting the assistance, EUR 1,500 per month is the maximum cost of an electricity bill that will be taken into consideration. The assistance can be applied for electricity expenses incurred during the period of 1 January 2023 to 30 April 2023. At the end of December, the Government also announced additional measures to support citizens in large electricity bills from the winter months. The Ministry of Economic Affairs and Employment states in its press release that according to an initial estimate the total amount of the support is approximately EUR 400 million at maximum. The support will be paid as a lump sum, and it is meant to help pay the electricity bills from the four winter months. It will be calculated based on the realised consumption during November and December. The maximum amount for the imputed monthly compensation is EUR 700 and the monthly own-liability threshold is EUR 100. It is assessed in more detail during the preparations how the support can be allocated in different situations as appropriately as possible.

   Published: 24.1.2023

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   Side letter agreements require expertise and diligence from the fund manager

   What is a side letter? Side letters are used particularly in conjunction with closed-end funds where the negotiation of the contract provisions is of high importance, considering that the rights to withdraw from such funds are limited and that the structure of these funds is complex. Open-ended funds (such as hedge funds) also typically utilise side letters, for example when a seed investor or cornerstone investor who is subject to special tax or regulation requirements is making a significant investment and requires customised special conditions. A side letter can be used to supplement and amend the provisions of a fund’s constitutional document (such as the fund agreement of a limited partnership fund). Side letters are typically required when an investor has particular commercial, legal, tax-related or operative concerns about investing in a fund. Sometimes a side letter is mandatory so that the investor can join the fund in the first place due to the special provisions applied to the investor or the commitments the investor has made to other parties (such as the investor’s own investors). On the other hand, the investor often has an incentive to negotiate a set of agreements that suits them best both commercially and legally.   The parties to a side letter If the fund is structured as a limited partnership, side letter arrangements are typically made between a general partner acting on behalf of the fund and individual investors. If the fund is a Finnish special investment fund, the parties to the side letter are the investor and the alternative investment fund manager on behalf of the special investment fund. In limited partnership funds, some investors can request that the alternative investment fund manager and the investment manager become additional parties to the side letter in order to facilitate the enforcement of the provisions concerning the operations of the said parties. Therefore, side letters should be drafted carefully to ensure that the correct parties are bound by them. A fund agreement may not be amended without the consent of the investors unless it is specifically provided for in the fund agreement. This being the case, while a side letter can be used to amend certain provisions of the fund agreement between a general partner and an individual investor, it cannot be used to supersede the interests of other investors or to amend the fund agreement in relation to other investors. The right to make side letters must be provided for in the fund agreement The fund agreement must include a provision that explicitly allows the fund’s general partner and individual investors to enter into side letter agreements that change the conditions of the said investor’s fund investment in relation to the provisions under the fund agreement. The explicit authorisations for entering into side letter agreements that are provided for in the fund agreement play an important role, particularly when foreign institutional investors demand separate legal opinions on the enforceability of side letters. The fund agreement clause authorising the making of side letters can limit the special conditions that a general partner may grant the investors, although the market practice is to draft the authorisation clause to be very broad. In any case, this clause must allow not only side letters but also the types of conditions that the general partner can propose to the investors (or at least it should not prohibit them). Regulation ensures the equal treatment of investors In addition to the commercial and practical aspects of making side letters, fund managers should pay attention to the associated regulatory issues. Fund managers must comply with provisions on preferential treatment of the Alternative Investment Fund Managers Directive (2011/61/EU, ‘ AIFMD ’) which have been implemented into to the Act on Alternative Investment Fund Managers (7 March 2014/162). Pursuant to the AIFMD, investors must be provided with ‘a description of how the AIFM ensures a fair treatment of investors and, whenever an investor obtains preferential treatment or the right to obtain preferential treatment, a description of that preferential treatment, the type of investors who obtain such preferential treatment and, where relevant, their legal or economic links with the AIF or AIFM’. This disclosure obligation is in force before the investment is made and also after any material changes to the preferential treatment. There are several ways to carry out the disclosure obligation. Legal risks associated with side letters The most important goals of fund managers are to raise capital and to acquire new investors. They might therefore be very tempted to approve side letter requests from investors who are ready to make a large investment in the fund. This kind of situation may be at hand particularly when an investor demands a side letter just before the fund is closed, allowing the investor to gain an advantage on the fund manager due to urgency. The risks associated with side letters should be kept in mind when negotiating and drafting them. First, it is important to understand that once a side letter is made, the fund manager may have two competing obligations: 1) the obligations towards all investors pursuant to the fund agreement, and 2) the obligations towards an individual investor pursuant to the side letter. In a conflict situation, the provisions of the side letter will generally prevail. The fund manager can usually balance these competing obligations. For example, if the fund manager waives their fee with respect to a specific investor in full or in part, usually there will be no significant conflict as the exception does not have a detrimental impact on the other investors. However, some common side letter arrangements may cause potential legal problems to fund managers. If, for example, the side letter allows an investor to withdraw from the fund prematurely, the fund manager may need to respond to an action on not fulfilling their duty of care towards the other investors as the other investors can claim that the side letter has put them in a materially unfavourable position. Legal evaluation is also necessary for such side letter conditions that grant the investor rights to the distribution of funds deviating from the fund agreement or that mitigate the investor’s payment obligations towards the fund, as this might lead to an increase the other investors’ relative payment obligations. Prepare for side letter arrangements in advance and draft them carefully in writing Although fund managers may be tempted to approve side letter requests, it is recommended to use appropriate consideration and care in approving the requests.  A clear strategy for side letters should be a part of the fund establishment from the start. It is recommended to prepare a roadmap that determines the most likely recipients of side letters and the conditions they may be granted. The fund’s constitutional document, and preferably the private placement memorandum as well, should contain an appropriately formulated clause to inform the investors that the fund manager can make side letters with individual investors. Fund managers must also ensure that they do not make oral agreements. All side letters that concern amending or supplementing the fund agreement provisions should be made in writing. Often the investors asking for side letters will require this in any case, but it is important for fund managers to refrain from making vague promises. This also applies to any email correspondence between the fund manager and a potential investor on the interpretation of the fund agreement provisions. It can be unclear whether this constitutes a binding agreement.   When assessing each side letter request, the main concern of fund managers is to see whether the conditions of the proposed side letter impact their duty of care towards the other investors. If the conditions of the side letter do not affect the other investors, there should be no trouble. The assessment of situations that are not as clear, such as the customised requirements of large foreign institutional investors, may require specialised legal advice. Read our previous blogs on funds: Special investment funds also work as closed-end funds – pay attention to special provisions Continuation Funds as a Tool for Creating Liquidity

   Published: 30.12.2022

9. Post

   Special investment funds also work as closed-end funds – pay attention to special provisions

   What is a special investment fund? Since 1996, it has been possible to establish special investment funds. Before that, various limitations set by legislation made it in practice difficult to develop products relating to special investment funds. Previously, special investment funds have typically been almost like UCITS funds and have only to a lesser degree deviated, for example, from the diversification rules of UCITS funds. However, since the Act on Alternative Investment Fund Managers entered into force, it has been possible to establish special investment funds. Special investment funds are one possible legal structure for Alternative Investment Funds (AIF), and the related provisions are laid down in the Act on Alternative Investment Fund Managers. Special investment funds are contractual funds that are not legal persons. Investment activities and management of special investment funds are carried out by the Alternative Investment Fund Manager (AIFM) who does however not own the special investment funds under its management. Instead the right of ownership to the assets in the special investment fund remains with the persons, entities and other legal arrangements that have invested their money in the fund. A special investment fund is divided into fund units that create equal rights to the capital in the fund. The fund units can be further divided into fractions. A special investment fund cannot conclude contracts, but they are concluded by the AIFM representing the special investment fund. Generally, there is very little regulation on the investment activities of AIFs, and it mainly concerns the AIFM. Special investment funds deviate from AIFs having some other legal structure in that the investment policy is regulated in more detail for special investment funds than other legal structures. Secondly, they also deviate from AIFs with some other legal structure by their taxation because in Finland, the taxation of funds is determined based on the legal structure. It is also typical for special investment funds that certain provisions of the Act on Common Funds (213/2019) apply to them, such as certain provisions on fund management and calculation of the value. A closed-end special investment fund is widely suitable for various needs In Finland, closed-end funds, from which it is not possible to redeem fund units, have typically been established as limited partnerships. Due to their flexibility under private law, limited partnerships suit the needs of closed-end funds relatively well. However, limited partnerships have some characteristics that are not optimal for the needs of investmend funds, such as relatively heavy administration and complicated documentation. Special investment funds in closed-end form have lately become more common in Finland. A special investment fund structure is widely suitable for funds with different investments strategies, for example traditional private equity funds but also feeder funds or funds of funds. Establishing non-UCITS funds is more straightforward than establishing limited partnerships The board of directors of the AIFM decides on the establishment of a non-UCITS fund. Establishing an AIF is more straightforward than establishing a limited partnership fund that needs a limited liability company to act as the general partner. A separate general partner company is typically established for each limited partnership fund for risk management reasons. Managing several general partner companies may pose challenges as the number of funds under management increases. In contrast, a non-UCITS fund does not have a general partner company, but the AIFM can establish several non-UCITS funds or investment compartments, which brings synergies to the administration. The assets and obligations of a non-UCITS fund have been separated from the AIFM under law so the AIFM cannot become liable for the obligations of the non-UCITS fund, and the owners of the fund units cannot become liable for the obligations of the AIFM. Simple company structure makes management more efficient Due to the simple company structure, the management of non-UCITS funds is more efficient than the management of limited partnerships. There is also no obligation to make notifications of changes in investors to the Trade Register. The typical elements in the management of closed-end funds can be determined in the fund’s rules. These include, among other things, the investors’ voting rights in matters that have been agreed separately as well as the advisory committee. In non-UCITS funds, it is also possible to use an investment compartment structure, which is not possible in limited partnerships. With an investment compartment structure, it is possible to create more economies of scale in the management. Clearer documentation to make fund management more flexible The fund rules are the non-UCITS fund’s instruments of incorporation. It is not necessary to draft a public partnership agreement, a summary of the detailed fund agreement, which is a specialty of limited partnerships. The rules of a non-UCITS fund are not public. In closed-end non-UCITS funds, it is possible to agree on preferential treatment of certain investors in the same way as in limited partnership funds. This is important in order to properly account for the special needs of the different investor groups. A fund prospectus can also be drafted of a non-UCITS fund. In closed-end non-UCITS funds, investors usually provide their investment commitments with a separate subscription agreement. The special characteristics of the non-UCITS funds also provide new possibilities in marketing Due to their simple structure, non-UCITS funds may be easier to market to non-professional investors. Certain investor groups also appreciate the fact that the identity of shareholders is not public knowledge, unlike in limited partnership funds. A non-UCITS fund is often suitable for investor groups for which it is not profitable to invest in limited partnership funds for tax-related or other reasons. In that case, the non-UCITS fund may make it possible to avoid establishing a feeder fund tailored for certain special investor groups (such as a limited partnership with a profit-sharing loan), which provides cost savings and streamlines the administration. Due to sustainability aspects, some investor groups may also avoid complicated feeder fund structures that aim at optimising taxation, which has increased the interest in non-UCITS funds. The investment compartment structure also provides other structuring possibilities, which have previously not been used in Finland. The impacts of special provisions should be accounted for when planning the fund structure Despite the numerous advantages, it is recommended to account for the impacts of special provisions concerning non-UCITS funds when planning the fund structure. The regulation concerning non-UCITS funds decreases the need to determine everything in detail in the fund rules, but it also sets certain boundary conditions for the fund’s operations. For example, the impact of the regulation concerning the number of investors, ways to organise the distribution of profit and adapting the share-based system of the non-UCITS fund to match the fund’s needs are matters that usually require some consideration in closed-end non-UCITS funds. By planning the fund structure carefully and developing the rules in an innovative manner, a non-UCITS fund can be adapted to the needs of a closed-end fund so that the outcome can be a viable alternative for establishing a limited partnership fund.

   Published: 30.12.2022

10. Post

    Nature Conservation Act approved after heated debate

    Parliament approved the new Nature Conservation Act on 13 December 2022. It will enter into force on 1 June 2023, replacing the old Nature Conservation Act (1096/1996) that has been in force since 1997. The structure and contents of the new Act remain largely the same. The aims of the Act are modernised by including climate change adaptation as one of the objectives. Some major reforms include laying down the precautionary principle in the Act, adding provisions on voluntary ecological compensation (see our blog on ecological compensation) and strengthening the protection of threatened species. Under the new Act, Metsähallitus can no longer allow ore exploration in national parks and strict nature reserves. The Act also prohibits the weakening of the traditional Sámi livelihoods and culture. Politically exceptional parliamentary debate The process to reform the Nature Conservation Act has been politically quite exceptional, and the contents of the legislative proposal have changed significantly along the way. The draft proposal was first circulated for comments in July 2021. In its statement of 23 December 2021, the Finnish Council of Regulatory Impact Analysis deemed that one of the key flaws and areas of improvement of the draft proposal was that the scope of the impact on companies and landowners was not clear and that the effect of the precautionary principle needed to be described in more detail by providing examples. The government proposal HE 76/2022 vp, submitted in May 2022, included some specifications in this respect. Despite the specifications, the government proposal became subject of a heated debate in the parliamentary proceedings. At the heart of the debate were two provisions concerning threatened habitat types, one of which contained statutory powers under which certain threatened habitat types could have been declared threatened with a government decree. The other provision included an obligation to take into account the habitat types in the decision-making process under other acts, for example in the permit assessment of the Environmental Protection Act (527/2014) and the Water Act (587/2011). The committees’ remarks focused in particular on the assessment of the impact and foreseeability of the provisions concerning threatened habitat types. The Constitutional Law Committee deemed that the foreseeability of said regulation should be improved and that its impact should be concretised. The Commerce Committee, for its part, stated that the regulation should not be an obstacle to new renewable energy projects or the upkeep of existing facilities. The Agriculture and Forestry Committee held that the preparatory works did not sufficiently account for the direct and indirect impacts on the protection of property and the preconditions of industrial and commercial activities – it was deemed that the provisions concerning threatened habitat types would have significant indirect impacts on the legal position of landowners and their constitutionally safeguarded protection of property. Finally, the Environment Committee recommended the complete removal of the statutory powers and the obligation to take threatened habitat types into account in the decision-making process under other acts. In addition, the wording of the precautionary principle was changed to be less obligating, and fishes and crayfish were excluded from the scope of the chapter on the protection of species. Behind these changes is an exceptional political situation in which the Centre, a governing party, ended up voting with the opposition. The voting itself did not happen without hiccups either – the inclusion of calcareous ponds, brooks and springs to the habitat types protected under the Water Act, included in the original government proposal, was accidentally voted out. However, Parliament did later approve a resolution obligating the Government to prepare an amendment for expanding the scope of the aquatic habitat types to correspond with the original proposal. The actual impact remains to be seen In the end, Parliament approved the government proposal as amended by the Environment Committee’s report. Based on the views presented by the Finnish Council of Regulatory Impact Analysis and the committees, the impact of the Act remains unclear. The changes approved by Parliament can perhaps be seen as a consequence of this. The practical impact of the new Nature Conservation Act on companies, for example, remains to be seen. The new Nature Conservation Act has already given rise to questions on the practical meaning of the precautionary principle. The recent discussion surrounding the application procedure and acceptability of the precautionary principle has been active. We will also take part in the discussion by publishing a blog on the subject in the near future.

    Published: 30.12.2022