Taxation Review

This review takes a brief look at recent taxation practices and case law. This review covers:

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.

International Taxation

Impact of Brexit on Indirect Taxation

The UK’s exit from the EU took full effect at the start of the year when the transitional period of the EU’s and UK’s withdrawal agreement ended. From the start of 2021, trade between the EU and UK is subject to the terms of the trade deal between them. The impacts of Brexit are particularly visible in customs and value added taxation.

All goods moving between the UK and the EU must be cleared at Customs as of 1 January 2021. Any goods moving between the UK and the EU are regarded as imports and are subject to VAT. An exception to the Customs and VAT rules is formed by Northern Ireland, which has special status based on a protocol of the withdrawal agreement.

New OECD Guidance on Transfer Pricing Implications of the COVID-19 Pandemic

The OECD has published new guidance on the practical application of the arm’s length principle during the COVID-19 pandemic. The new guidance is applicable together with the transfer pricing guidance published in 2017. The guidance deals with four main issues: comparability analysis, losses and the allocation of COVID-19 specific costs, government assistance programmes, and advance pricing agreements.

Foreign Corporate Entities Considered Resident Taxpayers Based on Place of Effective Management

Finland’s power to levy and collect taxes expanded following the amendment of the Income Tax Act (1188/2020), as foreign corporate entities with their place of effective management in Finland are now considered resident taxpayers. The place of effective management is the place where the entity’s most important daily management decisions are made. The change brings Finnish regulations on corporate tax liability more into line with those of other countries.

Following the amendment, foreign corporate entities with their place of effective management in Finland will also be subject to exit tax. The Finnish Tax Administration has updated its exit tax guidance due to the amendment.

Final Losses of a Subsidiary in the EEA are Deductible as a Group Deduction

The President of the Republic approved the Act on Group Deductions for Final Losses of a Subsidiary Located in the EEA (1198/2020), which provides that a parent company can deduct the final losses of a subsidiary located in the EEA as a separate group deduction.

Final losses are losses that the subsidiary or other party cannot make use of in the subsidiary’s country of tax residence or elsewhere. The act is applied to entities that could either grant or receive group contributions under the Act on Group Contributions in Taxation.

Income Taxation

Change to Tax Treatment of Personnel Offerings of Unlisted Companies

Following an amendment to the Income Tax Act (1071/2020), employees will not be considered to receive tax benefit when they subscribe for shares in their employer company if the subscription price corresponds to the mathematic value of the shares. If the subscription price is less than the mathematic value, the difference between the subscription price and the mathematic value is considered taxable income. This clarifies the valuation of benefit in personnel offerings by unlisted companies, as the mathematic value is often lower and easier to determine than the previously applied fair value.

The reform provides a tax-favourable opportunity for employees to subscribe for shares in personnel offerings by their employer company, which is an important retention tool for the company. All of the conditions listed below must be met for the amendment to apply:

Additional Deduction to Encourage R&D

The new Act on an Additional Deduction for Research and Development in the 2021–2025 Tax Years (1078/2020) gives companies the chance to make an additional 50% deduction of subcontracting costs of research organisations referred to in the act, provided that the costs arise from cooperation between the company and the research organisation. The maximum amount of the additional deduction per tax year is EUR 500,000 and the minimum is EUR 5,000.

Indirect Taxation

Minimum Threshold for Business VAT Liability Increased to EUR 15,000

The threshold for VAT-exempt minor business operations increased from EUR 10,000 to EUR 15,000 following the entry into force of an amendment to the Value Added Tax Act (961/2020) at the start of the year. A seller is not liable to pay VAT if their turnover during the financial year does not exceed EUR 15,000, unless the seller themself has registered as VAT liable. The amendment lightens the administrative burden on small companies. The new provision is applicable to tax years starting on 1 January 2021 and thereafter.

Industrial Electricity Tax Reduced to EU Minimum

The electricity tax for industry, mining operations, data centres and agriculture has been reduced to the EU’s minimum level following the entry into force of amendments to the Act on Excise Tax on Liquid Fuels (1032/2020) and the Act on Excise Tax for Electricity and Certain Fuels (1033/2020). In addition, the energy tax refunds for energy-intensive companies will be phased out during 2021–2025.

Case Law

Supreme Administrative Court: Provisions on Capital Losses Were Not Applied to the Transfer of Shares When the Purchase Price was Zero

In decision KHO 2020:145, the Supreme Administrative Court found that the provisions on capital losses were not applicable to a transfer of title in which the purchase price agreed in the sale and purchase agreement was zero euros.  The Income Tax Act’s provisions concerning the taxation of capital gains does not define the concept of a transfer and does not specify that the recipient should pay the transferor consideration.

However, the Supreme Administrative Court stated that the nature of capital gains taxation means that it only applies to transfers in exchange for consideration and that the provisions concerning capital gains and capital losses form a single whole. No capital losses that could be taken into account in income taxation had accrued, because no actual consideration had been paid, despite the document being called a sale and purchase agreement.

Supreme Administrative Court: Insurance Premium of a Warranty & Indemnity Policy Was not a Deductible Annual Expense

In decision KHO 2020:152, the Supreme Administrative Court assessed whether the insurance premium of a Warranty & Indemnity policy taken out in connection with a corporate transaction was a deductible annual expense.

The Supreme Administrative Court found that the acquisition cost of shares includes all costs relating to the acquisition of the shares. In the case in question, the insurance policy has been taken out due to the acquisition of shares and had entered into force on the date of the signing of the share purchase agreement and the policy had been treated as a part of the share purchase agreement.

The Supreme Administrative Court found that the insurance premium paid on the basis of the policy was so closely related to the acquisition of the shares that it had to be considered a part of the acquisition cost of the shares and, thus, was not a deductible annual expense.

Supreme Administrative Court: Income for Share Subscription in a Scrip Dividend Arrangement Comparable in Taxation to Dividends

In decision KHO 2020:116, the Supreme Administrative Court found that shares subscribed for on the basis of a scrip are partially taxable income. In the case in question, shareholders were able to participate in the company’s share issue without compensation and subscribe for new issued shares in the company or alternatively the company would pay the share-specific distribution of assets in cash.

The Supreme Administrative Court found that the provisions of the Income Tax Act concerning dividends were also applicable to other forms of profit distribution than just dividends paid on the basis of a resolution to distribute dividends. Because a shareholder subscribing for shares in the case in question was waiving a cash dividend payment and the number of shares subscribed for corresponded to the cash dividend, the scrip subscription was not considered a share issue and was partially taxable income of the shareholder.

CJEU Takes Position on the Transfer of the Adjustment Right and Obligation in Real Estate Transactions

CJEU judgment  C-787/18 concerned the transfer of the adjustment right and obligation concerning VAT deductions of real estate investments from the seller to the buyer in real estate transactions.

The CJEU found that the VAT Directive precludes national provisions that release the seller of a real estate property from their adjustment obligation in connection with a transaction and imposes the adjustment obligation on the real estate purchaser for deductions they have not made prior.

According to the CJEU, the adjustment right and obligation can only apply to the taxpayer that originally made the real estate investment. The judgment concerned the VAT deduction adjustment system in Sweden’s VAT legislation applicable to real estate investments.

There are obvious similarities to Finnish legislation, and the judgment is a challenge to Finland’s Value Added Tax Act.