Taxation Review September 2021
This review takes a brief look at recent case law and news. We would be happy to discuss the items in this review with you and the potential effects they may have on your business in more detail.
The review includes a summary of the tax reforms from the latest government budget session as well as recent case law.
Government Budget Proposal Aims to Broaden the Tax Base and Combat Aggressive Tax Planning
The Ministry of Finance announced the government’s budget proposal on 9 September 2021. The budget proposal outlined a tax package to strengthen general government finances by approximately EUR 100 million. The new decisions will take effect in 2022 and 2023. The details of the announced changes will be specified as preparation continues.
- Capital Gains Tax for Natural Persons: The plan is for the capital gains tax for natural persons to be broadened in situations where natural persons move abroad (an ‘exit tax’). This exit tax would broaden the power to levy taxes to capital gains accrued while living in Finland in situations where the assets are sold while residing abroad. A similar tax is currently applied to undertakings. This reform is planned to take effect from the start of 2023.
- Limitation of Deductibility of Interest Expenses: The provisions on the limitation of deductibility of interest expenses will be reformed by restricting the application of the balance sheet exemption from the beginning of 2022. The aim is to amend legislation so that the provisions will prevent the transfer of taxable income beyond the reach of Finnish taxation in private equity structures.
- Taxation of Real Estate Investments of Foreign Funds: Gains derived from the real estate investments of foreign funds will be taxed in Finland as broadly as possible from the beginning of 2023. The reform ensures that Finland maintains the right to tax capital gains from real estate in situations where the disposed entity is an entity that owns real estate indirectly.
- Transfer Pricing Adjustment: The transfer pricing adjustment provision will be revised from the beginning of 2022 so that it can be applied within the scope of the OECD Transfer Pricing Guidelines.
- New Mine Tax: A mine tax will be introduced in 2023 instead of increasing the electricity tax category in mining operations. Sixty percent of the mine tax revenue will be directed to the municipalities where the mines are located.
- Restriction of Forest Deductions: The opportunities for forest funds to take advantage of forest deductions will be restricted from the beginning of 2022.
- New Health-Based Tax: The Government will launch preparation aimed at introducing a health-based tax. In the first stage, the excise duty on soft drinks will be amended in a health-based direction so that the changes will enter into force in 2023. In the second stage, a tax model will be prepared to broaden the tax base of the health-based tax to other product groups.
The proposed changes have given rise to extensive debate and, as they stand, include many open questions. Some of the proposed changes can be expected to be challenging to implement in practice. The exit tax for private individuals, in particular, involves many practical problems.
The Government will debate the budget proposal on 27 September, after which the government proposal for the 2022 Budget will be published.
Recent Case Law
Supreme Administrative Court Issues Several Positions on Application of Limitation of Deductibility of Interest Expenses
The Supreme Administrative Court issued several decisions in September that took a position on questions relating to the application of limitations of the deductibility of interest expenses. The following section briefly reviews yearbook decisions KHO 2021:123 and KHO 2021:124.
- In case KHO 2021:123, the taxpayer had entered into an interest rate swap agreement to hedge against the interest rate fluctuation risk related to their loan. The loan agreement had a fixed interest rate and included other obligations, such as payment obligations arising from a negative reference rate. The Supreme Administrative Court found that payments to be made based on an interest derivative contract had to be deemed payments corresponding to interest and, therefore, had to be taken into account when calculating net interest expenses.
In the decision, the Supreme Administrative Court also took a position on the concept of control, particularly on whether a joint venture agreement prevents the formation of control. The ownership of the company's share capital was evenly divided between two companies, which were independent of one another. The chairman of the board did not have the deciding vote in voting situations. In case of a tied vote that the shareholders could not resolve, the joint venture agreement set forth that the final resolution would be to dissolve the joint venture. The Supreme Administrative Court found that as neither shareholder of the company had control, the company was not deemed to have a group link to the owners in the meaning set forth in the limitations of the deductibility of interest expenses.
- Decision KHO 2021:124 took a position, in particular, on preparing consolidated balance sheets. The Supreme Administrative Court was called on to decide, among other things, whether the consolidated balance sheet prepared by a private equity fund incorporated as a limited partnership and functioning as a parent company could be deemed a comparable balance sheet in accordance with the balance sheet test. The private equity fund functioning as the parent company was not obligated to prepare consolidated financial statements. However, the company had the ability to prepare consolidated financial statements in accordance with the Accounting Act for the purpose of applying the balance sheet test. As the fund had had the option of preparing consolidated financial statements in accordance with the Accounting Act, the narrower consolidated balance sheet that had been prepared was not acceptable as the basis of comparison in the balance sheet test.
Two Supreme Administrative Court Yearbook Decisions on Deducting Losses in Income Taxation
The Supreme Administrative Court has issued two yearbook decisions on deducting losses in income taxation. In the cases in question, losses confirmed in taxation were not carried forward in a merger.
- In case KHO 2021:104, losses transferred in a merger were not carried forward as tax deductions in the merger, because the shareholders of the receiving company had not owned over half of the shares in the merging company from the start of the loss year. The Supreme Administrative Court found that the provision concerning the carry-forward of losses could not be applied to the benefit of the taxpayer more expansively than its wording by taking the shareholding of the companies in the loss-making merging company into account.
- In case KHO 2021:105, losses confirmed in the merging company's taxation did not carry forward in the merger, because a shareholder in the receiving company had not acquired a share or shares in the receiving company prior to the start of the loss-making tax year of the merging company. Neither the goals of the merger directive nor the business reasons for the merger were given weight in the matter.
It is particularly important to pay attention to the transfer of losses in mergers and acquisitions, and to carefully assess the prerequisites for their application when planning a merger or acquisition.
Share Swap Prior to Sale of Share Deemed Tax Evasion
In decision KHO 2021:65, the Supreme Administrative Court took a position on the application of the tax evasion norm and found that the norm was applicable in a situation in which a share swap was planned to be carried out prior to the sale of shares.
Company A was the parent company of a group engaged in the construction business and owned the entire share capital of Company B. Company B intended to carry out a tax-neutral share issue in which Company A would subscribe for all of the shares and would transfer as contributions in kind the share capital of six housing companies that it owned and that were entered in its inventories. No cash consideration was planned to be used in the arrangement. After the transfer of the contribution in kind, Company B would act as the developer of the housing companies, i.e. would hand over the construction contracts to the housing companies and would then sell the shares in the housing companies. The business grounds for the arrangement that had been presented in the matter were clarifying and stabilising Company A’s operations by moving developer operations under the subsidiary as well as acquiring the references necessary for Company B’s developer operations, which were starting up. The fair value of the housing company shares owned by Company A at the time of the share transfer, and thus, their acquisition cost in B’s taxation, was significantly higher than their acquisition cost in Company A’s taxation.
The Supreme Administrative Court found that the share transfer was just a tool in an arrangement that was actually aimed at ultimately selling the shares in the housing companies. The share swap would make it possible to increase the acquisition cost of the shares in Company B’s taxation, which was deemed to give rise to tax benefits alien to the system.
When also taking into consideration the business grounds presented, the Supreme Administrative Court found that the sole purpose or one of the main purposes of the arrangement was to avoid tax, and the contemplated share swap could not be deemed to be tax neutral.