Restrictions to Deductibility of Interest Costs Created Debate at C&S Tax Seminar
The tax seminar organised by Castrén & Snellman’s tax team focuses on the legislative amendments entering into force at the turn of the year. A few key themes came up amongst the presenters and panellists — in particular the new restrictions on deductibility of interest payments that will be applicable during the 2019 tax year. At the time of writing, the Government Bill is currently undergoing parliamentary hearings.
Partner Elect Mikko Alakare chaired the seminar and panel and presented a current events review, which covered the interest deductibility restrictions as well as i.a. the effects of changes to source of income system. The national tax evasion provision, which would remain unchanged, received particular attention. This almost one hundred year old provision, which is interpreted expansively, continues to cause several tax disputes and has a significant impact on the predictability of Finnish tax system and legal protection of taxpayers.
Our panellists discussed various practical perspectives on transactions as well as the effects that amending legislation is anticipated to have on transactions. The interest deduction restrictions will in their suggested form have a particular impact on real estate investments into Finland and the structuring thereof.
According to Counsel Matti Lajunen, current real estate holding structures were mainly designed at a time when no restrictions on the deductibility of interest costs were on the horizon. This could become a financially significant issue for investors, particularly as interest rates rise. At the moment it looks like the legislative amendments will be entering into force on a very tight schedule. These amendments have been seen amongst foreign investors as concrete proof that the risk of legislative changes is relevant in case of Finland, as well.
Unutilized net interest expenses are, and will continue to be, asset items with a net asset value. Counsel Tuomas Honkinen presented an M&A perspective and said that the entry into force of the restrictions on net interest expenses on bank loans will significantly limit the use of this asset. The value of net interest costs has already been recognised particularly in buyout arrangements. Moving forward, the monitoring of two distinct net interest expense categories will be up to each taxpayer.
The third issue that arose in discussions was the remaining uncertainty with respect to legislation. Partner Tero Tuomisto discussed about problems in relation to infrastructure projects: whether or not the interest costs of infrastructure projects financed through debt will fall within the scope of the restriction or not is undergoing further preparation and remains as an open question. This makes it significantly more difficult to calculate the profitability and feasibility of infrastructure projects. Furthermore, the changes in source of income system could also affect existing financing structures.
A financier’s perspective was provided by Nordea’s Markku Pitkänen, who brought up the fact that the loan agreements used by banks typically already have some flexibility for many of the factors relevant to debtor companies. The amendments to interest deductibility have not yet had any material effect on financing negotiations.
Senior Counsel Leena Romppainen from the C&S tax team brought up the problems relating to the proposed new balance sheet test regulation. The current legislative framework has problems which have been addressed by the Supreme Administrative Court, partially even through voting decisions. At the moment, it looks like certain open questions relating to investment fund structures will still be left up to the courts to solve. Issues relating to the sufficiently comparable financial statements required by the balance sheet test may also fall into this category.
At this stage, it looks like the best option for taxpayers with respect to future amendments to tax regulation is to ensure sufficient room for further amendments through finance, corporate and contract law means. Key issues from this point of view will be the Finnish Tax Administration’s forthcoming guidelines for the concept of items considered interest under interest deduction limitation regulation, as well as how useful the new balance sheet test regulation turns out to be in practice.