Proposed Restrictions to Interest Deductions Would Harm Finland’s Competitiveness

A few weeks ago, the Ministry of Finance published a draft bill for amendments to the right to deduct interest expenses. The proposal has some major issues that threaten to harm Finland’s competitiveness as a destination for international investments. Corporations and financial institutions will also find much to criticise in the proposal.

Bringing Finnish National Legislation up to the Minimum Level of the Directive

The proposed amendments are based on the EU’s Anti Tax Avoidance Directive (ATAD), which sets a minimum level for national legislation. However, the Ministry of Finance’s proposal goes significantly further than the ATAD requires. Finland should not implement more strict regulations than the minimum required level, because we don’t yet know how our key competitors are implementing the same directive – based on preliminary information, they are certainly not going as far as the Finnish proposal. Furthermore, Finland should take advantage of the wiggle room provided by the directive in order to secure our national competitiveness.

Tightening Rules for Interest Deduction

The minimum level required by the ATAD will already significantly tighten national interest deduction rules, but the Ministry of Finances proposal goes even further. In addition to restricting affiliated company interest deductions, the Ministry proposes restricting the deduction of interest expenses of loans from third parties. The Ministry’s proposal would expand the scope of restrictions to the point that they would catch, for example, companies in the real estate business and financial sector. The proposal also significantly expands definition of interest to cover various bank fees and advisory costs.

According to the proposal, the deductibility of interest expenses payable to third parties would only be restricted when the tax subject is part of a group or is associated with the other party or has a permanent establishment. It is odd, to say the least, that the legislator would take such a strong hand in guiding how companies arrange their own operations. If establishing a subsidiary or expanding operations abroad could poison a company’s existing bank financing, we can justifiably ask whether this kind of regulation is acceptable from the perspective of the right of domicile and equality.

As the current regulatory framework will be changing in any case, it is vital that the most problematic parts of the bill be addressed without delay. The new regulations will force tax subjects to reassess their financing and even their corporate structures, and it is vital that the final form of the amendments is clear as soon as possible. Due process requires that any amendments be known as soon as the tax year starts. The current proposed timetable is unacceptable for tax subjects whose 2019 tax year has already started.

In my opinion, at least the following changes should be made to the proposal:

Predictable tax treatment and flexible financing opportunities are decisive factors for international investors considering investments in Finland. Interest deduction provisions are a key part of tax treatment. As we don’t yet know what other countries are doing, it is completely unnecessary to harm Finland’s attractiveness by implementing the ATAD bin a more stringent form than international agreements require.