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Finland: Proposed amendments, interest deduction limitation rules

Finland: Proposals, interest deduction limitation rules

The Finnish government on 27 September 2018 released a proposal to amend the interest deduction limitation rules pursuant to implementation of the EU Anti-Tax Avoidance Directive (2016/1164/EU). If enacted, the new interest deduction limitation rules would be effective as of 1 January 2019.

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Under the proposal, Finland would not implement all of the relief options provided by the EU directive.

Overview of the most significant changes

  • The interest deduction limitation rules would be extended to apply to interest paid to both related parties and third parties. A new threshold of €3 million would be applied for net interest expenses on third-party debt. 
  • The limitations would apply to all Finnish resident corporate taxpayers, including partnerships as well as companies taxed under the income tax law. Thus, the new rules would apply to real estate companies that currently fall outside the scope of the interest limitation rules.
  • Stand-alone entities would not be within the scope of the new restrictions. A stand-alone entity is defined as a taxpayer for which none of the parties has an over 25% direct or indirect ownership, voting rights or capital ownership.
  • The limitation rules would not be applied to financial institutions (as defined in the new measure). As opposed to the current regime, certain service companies belonging to financial institution group would be subject to the new rules.  
  • Public infrastructure projects related to, for instance, social housing would be outside the scope of the limitation rules. The exact scope of the infrastructure projects that would be excluded is still under consideration.
  • The definition of interest would be expanded to cover expenses related to obtaining financing. Financial considerations paid to mutual real estate companies would not fall under the definition of interest.

Some of the current rules generally would remain unaffected

  • The balance sheet comparison test would remain in the legislation. However, in order to conduct the test, the balance sheets being compared would have to be prepared according to the same accounting principles or converted to be equivalent comparisons. This could be challenging if the group’s consolidated balance sheet is prepared in accordance with international accounting standards. 
  • The general threshold of €500,000 would continue to apply to the net interest expenses paid to group companies. The definition of group companies would correspond to the current domestic law definition of related parties (50% direct or indirect control).
  • As currently applicable, the deductibility of net interest expenses would be limited to 25% of EBITD (earnings before interest, taxes and depreciation) or taxable business profit added with interest expenses, tax depreciations, and net group contributions.
  • Non-deductible interest expenses would continue to be carried forward indefinitely.

Implementation of the new rules

  • According to the grandfathering rule, the interest deduction limitations would not apply to third-party loans concluded before 17 June 2016 or interest expenses capitalized in taxation before 1 January 2019.
  • The new rules would be effective for the tax year 2019.

 

For more information, contact a KPMG tax professional in Finland:

Hanna Höglund | +358 20 760 3278 | hanna.hoglund@kpmg.fi

Jaakko Järvinen | +358 20 760 3919 | jaakko.jarvinen@kpmg.fi

Jussi Järvinen | +358 20 760 3077 | jussi.jarvinen@kpmg.fi

Salla Puustinen | +358 20 760 3000 | salla.puustinen@kpmg.fi

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