On May 19 th 2016 the Finnish Supreme Administrative Court (SAC) issued two yearbook decisions concerning deductibility of interest costs in debt push down arrangements. On the same day SAC ruled on three other similar debt push down arrangements. However, SAC dismissed permissions to appeal in the three latter cases in which the arrangements had been deemed as tax avoidance by administrative courts.
According to the said new SAC decisions interest expenses can be regarded as non-deductible when the acquired shares to which the debt relates cannot be allocated to branch’s assets or when the arrangement can be deemed as tax avoidance. In all five cases the debt had been allocated to a foreign entity’s Finnish branch that constituted a permanent establishment in Finland.
Tax Administration published guidance on May 27th, 2016, according to which the SAC rulings will have an impact on the debt push down arrangements carried out through a branch or a special purpose vehicle (a Finnish company established for an acquisition; hereinafter also referred as ‘SPV’).
According to Tax Administration the SAC decisions apply also to SPV arrangements. In accordance with Tax Administration’s guidance it results from the SAC decisions that debt push down arrangements can be deemed as tax avoidance, provided that:
1. The intra-group funding is organized through a Finnish branch or an SPV and;
2. The arrangement has been given a legal form that does not correspond the true nature and purpose of the matter (substance-over-form provision) and;
3. The objective of the arrangement is to avoid tax.
Tax Administration recommended companies to confirm the tax treatment of significant mergers and acquisitions and other operations involving tax risk from the Tax Administration, for example by applying an advance ruling.
KPMG’s understanding of the issue
All the before mentioned SAC decisions concerned debt push down arrangements carried out in branch structure. Furthermore, the acquired shares and corresponding acquisition debt were allocated to foreign group company’s Finnish branch. The question of debt push down carried out through SPV was not directly treated in the decisions. SAC stated, however, that the denial of interest deduction is possible on the basis of the general anti-avoidance rule also in the cases concerning SPV structure, if the arrangement is deemed as tax avoidance.
Taking these new SAC decisions into account, it is clear that the acquisition debt resulting from the target company’s shares must not be allocated to Finnish branch using debt push down arrangement without a positive advance ruling from the Tax Administration (the deductibility of interest expenses is uncertain even when using a loan from an outside bank and/or buying target company directly from the foreign vendor to Finnish branch). It seems unlikely to acquire such a positive advance ruling if there are no exceptionally strong business reasons for the arrangement.
The legal situation concerning the arrangements carried out using SPVs, however, is unclear for the time being. Nevertheless, the deductibility of interest expenses can be denied, if the arrangement is deemed as tax avoidance. In any case it is obvious that the tax authorities will scrutinize SPV structures and in most cases possibly seek to contest the right for interest deduction also in debt push down arrangements carried out using SPV structures. On this account it is extremely important to be able to show valid business reasons for the arrangement also when using SPVs, and for now it is not recommended to set up such an arrangement without applying binding advance ruling from the Tax Administration. As the legal situation concerning SPVs is unclear, it is recommended that the entity used would not be a mere holding company but it would have enough substance that would relate to subgroup’s corporate governance and/or strategic management and that the company would have the staff and the competence needed to carry out these functions. Only the future legal praxis will clarify the situation in respect of SPV structures.
Background - SAC decisions 19th May
SAC:2016:71 (decision in Finnish)
In the decision SAC:2016:71 the court stated that the subsidiary shares acquired by the branch were not treated as assets belonging to the branch. Consequently, the related acquisition debt interest was deemed non-deductible in the branch’s taxation.
SAC:2016:72 (decision n Finnish)
In the decision SAC:2016:71 the court ruled that the primary intention for the complex re-organization which resulted in non-taxation by means of group contribution and interest deduction was to avoid paying tax. Under these circumstances, the interest expenses were not deductible.
Cases where SAC did not grant the appeal
The cases in which SAC did not grant the leave to appeal regarded similar situations than the two yearbook decisions. The administrative court had deemed these arrangements to be tax avoidance.
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