The Finnish tax environment has changed fundamentally in recent years, and companies and prospective investors are expected to face even more changes on the upcoming implementation of the Anti-Tax Avoidance Directive (ATAD), which takes effect on 1 January 2019.
The Finnish tax environment has changed fundamentally in recent years, and companies and prospective investors are expected to face even more changes on the upcoming implementation of the Anti-Tax Avoidance Directive (ATAD), which
takes effect on 1 January 2019. In previous years, the Finnish government has implemented a variety of rules to prevent erosion of Finnish tax base such as earnings-stripping rules.
This section covers these developments and considers the following three fundamental questions facing prospective buyers:
This report also addresses other considerations that prospective buyers should take into account, such as company law and group contributions. This report concludes with a short summary of advantages and disadvantages of both, share and asset purchases.
Implementation of ATAD will present major changes to the Finnish tax law, especially the earnings-stripping rules that govern the deductibility of interest costs. Among these changes, the deductibility of interest paid on external loans will be limited, and the interest deduction limitation rules will be extended to companies that are taxed based on Finnish Income Tax Act (e.g. mutual real estate companies) and financial institutions. It seems that Finland will implement the measures of ATAD more strictly than the directive requires.
A merger is a tax-neutral way to combine Finnish companies. The following rules pursuant to the Business Income Tax Act apply for tax-neutral mergers:
Tax loss carry-forwards may be forfeited permanently in certain situations. The recipient company or its shareholders, or the recipient company and its shareholders together, must have held more than 50 percent of the shares of the merging company at the start of the year in which the tax loss accrued in order to retain the right to carry forward its losses and use its tax surpluses.
Pursuant to the Transfer Tax Act, a merger is not subject to transfer tax. However, where cash is used, the cash consideration is subject to transfer tax of 1.6 or 2 percent (even where the cash consideration does not exceed
10 percent of the nominal value, or in the absence of a nominal value, of the accounting par value of the newly issued or existing shares given by the recipient company).
Where the cash consideration does exceed 10 percent of the nominal value or accounting par value of the issued shares, the merger is not considered tax-neutral. In case law, the tax effects of a taxable merger are equivalent to liquidation; the merging entity is deemed to be liquidated for tax purposes. The effects of liquidation are discussed later in this report.
Finland has implemented the provisions of the European Union (EU) Merger Directive on mergers between companies in different member states. Thus, Finnish tax law regulating mergers applies to mergers between companies resident in two or more member states. Finnish company law was amended, as of 31 December 2007, to recognize cross-border mergers, so these mergers are also practical from a tax viewpoint.
Other tax-neutral transactions cover complete and partial demergers, transfers of assets and share swaps under certain preconditions that should be analyzed case-by-case. Certain clawback issues may be triggered, for example, in cross- border transactions.
An acquisition in Finland usually takes the form of a purchase of the shares of a company, rather than its business and assets, because capital gains on the sale of shares may be exempt in certain circumstances. From a tax perspective, the capital gains consequences and possible double taxation on extracting the sales proceeds are likely to make asset acquisitions less attractive for the seller. However, the benefits of assets acquisitions for the buyer should not be ignored, particularly given that purchased goodwill is tax- deductible. Some of the tax considerations relevant to each method are discussed below.
Purchase of assets
A purchase of assets usually results in an increase in the base cost of those assets, although this increase is likely to be taxable for the seller. In addition, historical tax liabilities generally remain with the selling company and are not transferred with the assets.
For tax purposes, it is necessary to apportion the total consideration among the assets acquired. It is generally advisable for the purchase agreement to specify the allocation, which is normally acceptable for tax purposes, provided it is commercially justifiable.
The Finnish Business Income Tax Act stipulates that the purchase price must be allocated to the individual assets up to their fair market value. The excess purchase price is
considered goodwill. Consequently, the buyer receives a step- up in the tax base of the assets and can deduct the goodwill for tax purposes. The goodwill must be capitalized and amortized over its economic life up to a maximum of 10 years.
Acquisition costs of patents, copyrights and trademarks, etc., are depreciated by the straight-line method over 10 years, or, where the taxpayer can show that the likely economic lifetime of the asset is shorter, over that period.
Expenses incurred in acquiring fixed assets are deductible through depreciation. The acquisition cost of the taxpayer’s entire stock of machinery and equipment is written off annually as a single item using the declining-balance method.
Under this method, the depreciation base consists of the net book value of all such assets plus the acquisition value of assets introduced during the tax year, less any sales proceeds, insurance compensation and the like received for assets sold, damaged or lost during the tax year. The maximum annual depreciation is 25 percent of this base.
Where the taxpayer can show that the current value of these assets is less than the depreciation base reduced by the
full 25 percent, the taxpayer is entitled to such additional depreciation as is necessary to reduce the depreciation base to the current value.
Where the depreciation base for machinery and equipment is negative, the excess is treated as current taxable income.
As an exception to the general rule, machinery and equipment with an economic life of 3 years or less can be either written off in full in the year of acquisition or depreciated along with other machinery and equipment.
Buildings and other constructions are also depreciated by the declining-balance method. Each building must be depreciated as a separate item. Maximum rates of depreciation range from 4 to 20 percent, depending on the use of the building.
Where a taxpayer can show that the current value of the building is less than its book value, the taxpayer is entitled to additional depreciation. Large repair costs can be
either deducted as a cost immediately or included in the depreciation base of the building.
The depreciation rate for industrial buildings, power stations, workshops, warehouses, stores and similar buildings is
7 percent. The rate for homes, offices and other similar buildings is 4 percent.
Tax losses are not transferred on an asset acquisition. They remain with the seller. The seller can utilize these tax losses against any capital gain realized on the sale of the assets.
Value added tax
All goods and services, unless expressly excluded, are subject to value added tax (VAT). The standard rate of VAT is 24 percent. As an EU member state, Finland has adopted VAT legislation in line with the EU VAT Directive.
VAT is not payable on the sale or other supply of goods and services where the sale or supply takes place in connection with the transfer of an entire business enterprise, or part of it, to a transferee carrying on the business and using the goods and services for a purpose that entitles the transferee to the deduction. Therefore, a transaction through an asset deal under these circumstances is not subject to tax.
Stamp duty and stamp duty land tax
A so-called ‘transfer tax’ of 1.6 percent is due on the fair market value of Finnish securities, including shares of Finnish companies, and 4 percent on the real estate transferred in the asset deal. The transfer tax is 2 percent on transfers of shares in real estate companies or housing companies. The transfer tax base is not only the equity value but also other payments (e.g. shareholder loan repayments) to the seller or its affiliates. Finnish tax authorities usually accept the purchase price allocation agreed by the seller and the buyer as an indication of the fair market value.
Purchase of shares
The purchase of a target company’s shares does not result in an increase in the base cost of that company’s underlying assets. There is no deduction for the goodwill
(i.e. the difference between underlying net asset values and consideration).
Tax indemnities and warranties
In a share acquisition, the buyer is taking over the target company together with all related liabilities, including contingent liabilities. The buyer, therefore, normally requires more extensive indemnities and warranties than in the case of an asset acquisition.
Where significant sums are at issue, it is customary for the buyer to initiate a due diligence exercise, which normally incorporates an analysis of the target’s tax affairs.
Taxable income or loss is calculated separately for the different sources of income (i.e. business income, agricultural income and other (personal) income). Tax losses may be carried forward for 10 years and set off against income from the same source in which the loss was incurred. Losses are deducted in the order incurred.
Where more than 50 percent of the shares of a company have changed ownership, the right to carry forward tax losses is forfeited unless the regional tax office grants a dispensation. Indirect ownership changes are taken into consideration where there has been a change in the ownership of a shareholder that owns at least 20 percent of the shares in the company in question. There are no special provisions allowing the losses of one company in a group to be deducted from the profits of other companies in the same group. However, group contributions are tax-deductible in certain conditions, which can be useful in utilizing tax losses within a group.
In 2011, the Finnish Supreme Administrative Court asked the European Court of Justice (ECJ) to determine whether the Finnish exemption system concerning tax losses and
changes in the ownership of companies with tax losses could constitute state aid, which is incompatible with the EU law.
The ECJ gave its judgment in 2013, but did not take a clear position on whether the exemption regime constitutes state aid. However, the ECJ has stated that the exemption regime should be classified as existing aid where it happened to constitute state aid. Thus, the Finnish Tax Administration should adhere to the tax laws in force and can continue to grant dispensations. However, the European Commission may investigate the compatibility of the dispensation regime with the EU law sometime in the future.
In the case of a merger, the acquiring company or its shareholders or both of them together must have held more than 50 percent of the shares of the merging company by the beginning of the loss-making year to retain the right to carry forward tax losses. No dispensation can be applied for in relation to tax losses forfeited in mergers.
Crystallization of tax charges
Capital gains taxation for the transferor can be deferred where preconditions for the exchange of shares are fulfilled. Where an acquisition is effected by the purchase of shares in exchange for the issue to the seller of new shares in the buyer, the gain may be rolled over into the new shares, thus enabling the seller to defer the Finnish capital gains tax liability. Additional conditions for the tax-neutrality are that cash compensation cannot be more than 10 percent of the issued shares’ nominal value (or accounting par value in the absence of nominal value) and that the buyer acquires more
than 50 percent of the voting power of the target. It is possible to obtain clearance in advance from the Finnish tax authorities that the exchange of shares transaction will be considered
tax-neutral (i.e. that the tax-free rollover is not denied). Capital gains taxation is realized to the extent cash compensation is paid to the transferor.
In certain circumstances, the seller may prefer to realize part of the value of their investment as income by means of a pre-sale dividend. The rationale here is that the dividend may
lead to lower Finnish tax but reduces the proceeds of sale and thus the gain on sale, which may be subject to a higher rate of tax. The dividend also reduces the consideration given for the shares in a Finnish company, so it could lower the amount of the transfer tax payable, which benefits the buyer, depending on timing of the dividend distribution. The position is not straightforward, and each case must be examined on its facts.
A so-called ‘transfer tax’ is payable at the rate of 1.6 or 2 percent on the value of the consideration given for shares and certain other payments that benefit the seller or its affiliates, provided either the seller or buyer is a Finnish resident individual or company. Where both the seller and buyer are not Finnish resident, no Finnish transfer tax is due unless
the objects of the transfer are shares in Finnish real estate or housing company. Special rules may apply to Finnish branches of certain foreign financial institutions.
It is possible to obtain a clearance from the tax authorities giving assurance that a potential target company has no arrears of tax within the last 12 months preceding the date of the tax certificate. The standard certificate relies on tax
return filings and payments of the target company. It does not state whether or not the target is involved in a tax dispute or whether the information on the tax returns was correct
Several potential acquisition vehicles are available to a foreign buyer, and tax factors often influence the choice. There is no capital duty on the introduction of new capital to a Finnish company or branch (or to a Finnish-registered SE (Societas Europaea, which is a European company)).
Finland holding company
There are no special rules for holding companies in Finland. Companies may qualify for an exemption from tax on capital gains in respect of gains realized on the disposal of shares where the seller has owned at least 10 percent of the share capital of the target company for at least 12 months prior to the disposal. Additionally, the shares must have been fixed assets of the seller.
The participation exemption does not apply where the seller is a company that carries on private equity or venture capital activities (word-for-word translation from Finnish is ‘capital investment activities’). The exemption also does not apply where the target company is a real estate company or other company, the activities of which consist of owning and managing real estate.
The definition of ‘private equity or venture capital activities’ has been left open in the law. Based on a statement of the Finance Committee of the Parliament, private equity and venture capital houses seek, finance and promote high-risk enterprises that may have difficulty obtaining financing from other sources. The purpose of the private equity/venture capital investor is to develop the activities of the company and contribute to the company’s value. The investor is not
a permanent owner but intends to realize its shareholding during a stated time period. Private equity and venture capital investors typically own a minority of the company’s share capital and do not normally receive any return on their investment before the disposal of the shares.
Although the above statement on private equity or venture capital activities brings some clarity, a number of issues remain open and the application of the participation exemption to private equity or venture capital investments is unclear. According to recent Supreme Administrative Court decisions, private equity-owned holding companies, incorporated for a transaction, may be considered as capital investors not entitled to the capital gains exemption.
Where the participation exemption is applicable, capital losses and write-downs in the value of the subsidiary shares are not tax-deductible. Unrealized share write-downs also are non- deductible for capital investors.
Interest costs related to the acquisition of shares are tax- deductible, provided that the earnings-stripping rules do not apply and the interest rate is arm’s length. It is possible to deduct the interest cost in the acquisition vehicle against the profits of the target company, provided a group contribution is allowable between the target and the acquisition vehicle (see ‘Group relief/consolidation’ below). A Finnish branch of a foreign company can also grant or receive a group contribution.
Restrictions on interest cost deductions took effect as of 1 January 2013 and apply for financial periods that end on or after 1 January 2014. (See ‘Choice of acquisition funding’ below.)
Foreign parent company
The foreign buyer may choose to make the acquisition itself, perhaps to shelter its own taxable profits with the financing costs. This does not necessarily cause any tax problems because Finland does not tax the gains of non-residents disposing of Finnish shares (unless the company’s main activity is to possess Finnish real estate). Finland levies withholding tax (WHT) of 30 percent on dividends. A reduced rate of 20 percent may be applied on dividends to certain foreign corporations. Further, the WHT is often reduced in the tax treaties concluded by Finland.There is no WHT on dividends paid to parent companies resident in the EU. Finland does not levy WHT on interest (subject to some minor exceptions).
Non-resident intermediate holding company
Finland has a comprehensive tax treaty network with more than 60 countries, including all the industrialized countries and almost all the important developing countries.
A non-resident company normally carries on business in Finland through a Finnish corporation (subsidiary) or
registered branch. The corporate tax rate of 20 percent applies to both subsidiaries and branches.
The calculation of taxable income is basically the same for a subsidiary as for a branch. Both must base their intercompany transactions on the arm’s length principle, and each is considered to be an independent entity for tax purposes.
However, a reasonable allocation of executive and general administrative expenses to the branch is allowed. A branch is not allowed to deduct interest on loans from the head office, but the profits of a branch may be remitted to the head office free of WHT.
The advantages and disadvantages of different vehicles must be considered case-by-case.
No special tax legislation applies to joint ventures.
A buyer using a Finnish acquisition vehicle to carry out an acquisition for cash needs to decide whether to fund the vehicle with debt, equity or a hybrid instrument that combines the characteristics of both. The principles underlying these approaches are discussed below.
The principal advantage of debt is the potential tax- deductibility of interest (see deductibility of interest), as the payment of a dividend does not give rise to a tax deduction.
Another potential advantage of debt is the deductibility of expenses, such as guarantee fees and bank fees, in computing taxable income from business activities.
Where it is decided to use debt, a further decision must be made as to which company should borrow and how the
acquisition should be structured. To minimize the cost of debt, there must be sufficient taxable profits against which interest payments can be made. The following comments assume
the buyer wishes to offset the interest payments against the Finnish target’s taxable profits. Consider also whether relief would be available at a higher rate in another jurisdiction.
Typically, a Finnish company is used as the acquisition vehicle, funding the purchase with debt either from a related party
or directly from a bank. Provided that at least 90 percent of the target’s share capital is acquired, it should be possible to offset interest paid against Finnish taxable profits arising in the target group from the beginning of fiscal year following the acquisition.
Generally, it is safer to introduce debt financing at the time of the acquisition than after because the Finnish tax
authorities have recently tried to challenge post-acquisition debt pushdowns. Further, the Finnish tax authorities have challenged intragroup reorganizations driven by new debt allocation.
There is no specific legislation denying post-acquisition debt push-down. Based on recent case law, debt push-down arrangements can be deemed as tax avoidance under certain circumstances. Careful tax planning is required, and local advice should be sought.
Deductibility of interest
The earnings-stripping rules apply for financial years that end on or after 1 January 2014. Limitations apply to Finnish
corporations and general and limited partnerships carrying on business activities; thus, the limitations do not apply to, for example, most real estate companies that are not treated for tax purposes as companies carrying on business activities.
However, this will change on 1 January 2019, when the ATAD is effective and the earnings-stripping rules begin applying to these companies as well.
Limitations also apply to foreign corporations in their Finnish taxation (i.e. to Finnish permanent establishments of foreign entities). Both domestic and cross-border interest expenses are subject to the limitations.
The limitations are based on the debtor taxpayer’s taxable business profits before tax earnings before income tax, depreciation and amortization (EBITDA). Received and paid group contributions are taken into account in calculating the taxable business income, but carried forward tax losses are not deducted.
Interest expenses are fully deductible corresponding to the received interest income. Interest cost exceeding the
received interest income is deductible insofar as it represents at maximum 25 percent of the tax EBITDA.
Interest cost exceeding the 25 percent threshold is not tax-deductible; however, the non-deductible interest expense is limited to the net interest expense paid to associated companies only. Where no interest is paid to associated companies, the tax- deductibility of the interest is not limited. This will change
on 1 January 2019, when external loans become subject to limitation rules as well. It appears that Finland will keep the current tax EBITDA level at 25 percent, even though ATAD allows 30 percent.
The determination of ‘associated company’ corresponds to the current legislation on transfer pricing adjustments. There are two exceptions (safe harbors):
The limitations are not applied to finance, insurance or pension institutions. The limitations described above are likely to apply to finance institutions as well beginning from 2019.
The limitations also cover so-called ‘back-to-back financing’ situations where the loan is obtained from third-party financier that has a collateral/guarantee from another associated company. However, such arrangements contaminate
the third-party financing only where the guarantee is a corresponding receivable (e.g. deposit).
Publicly issued bonds and cash pooling arrangement are usually not subject to interest limitations. The limitations do not signify a reclassification of the non-deductible interest expense to, for example, dividends. Thus, corresponding interest income is regarded as fully taxable for the recipient.
The non-deductible interest expense of a certain fiscal year accumulates and is deductible from the business profits
of the following fiscal years, taking into account the above limitations for each fiscal year. There is no time limit for the future deductibility, and changes of ownership do not affect the carry-forward of the deductions.
The limitations have a ‘lex specialis’ status. In practice, this means that the tax deductibility of interest expenses can also be limited or denied based on the arm’s length principle and general tax avoidance clause, where applicable.
No grandfathering is available. The limitations apply to interest expenses on existing intragroup debts that were in place before the beginning of financial year that ended in 2014.
Withholding tax on debt and methods to reduce or eliminate it
There is no WHT on interest in Finland (subject to minor exceptions).
Checklist for debt funding
A buyer may use equity to fund its acquisition, possibly by issuing shares to the seller in satisfaction of the consideration or by raising funds through a seller placing. Further, the buyer may wish to capitalize the target post-acquisition.
Finland does not impose capital duty on contributions to equity, and no stamp duty or Finnish transfer tax applies on new share issues.
According to guidelines published by the Finnish National Board of Taxes, capital/subordinated loans fulfilling the conditions set out in the Finnish Companies Act are considered as debt for Finnish tax purposes. Thus, the interest on such debt and on profit-participating loans is tax-deductible.
An acquisition often involves an element of deferred consideration, the amount of which can only be determined at a later date on the basis of the business’s post-acquisition performance. The right to receive an unknown future amount must be estimated based on the information available
at the time of the acquisition and considered as part of compensation. Where it turns out later that the estimate was not correct, the estimate must be corrected by notifying the tax authorities of the additional income or filing an appeal for a reduction of taxable income for the acquisition year.
Concerns of the seller
The tax position of the seller can be expected to significantly influence any transaction. In certain circumstances, the seller may prefer to realize part of the value of their investment as income by means of a pre-sale dividend. The rationale here
is that the dividend may be subject to low Finnish tax but reduces the proceeds of sale and thus the gain on sale, which may be subject to a higher cash tax. The dividend also reduces the consideration given for the shares in a Finnish company and thus the amount of the transfer tax payable, which could benefit the buyer, depending, for example, on timing of the dividend distribution. The position is not straightforward, however. Each case must be examined on its facts.
Finland does not tax gains of non-residents (except on disposals of real estate and companies whose main assets are real estate and on certain disposals by non-resident companies with a permanent establishment in Finland).
Company law and accounting
The Finnish Companies Act 2006 is a modern and comprehensive law that provides plenty of scope for reorganizations. For example, from the Finnish company law perspective, cross-border mergers and triangular mergers are possible.
It is possible for a Finnish company to follow IFRS in its single company accounts. Few companies have used this
option because the accounting is the basis for tax returns of a Finnish company, and IFRS and taxation were not reconciled. However, as of 2009, certain changes were made to the Finnish tax legislation that enable a tax-neutral merger, transfer of assets or demerger even where assets need to be valued at fair market value in accounting in accordance with IFRS. Still, IFRS is not beneficial, for example, for companies that are willing to grant or receive group contributions or have accelerated depreciation for tax purposes.
Another important feature of Finnish company law concerns the ability to pay dividends. Distribution of profit may be made only out of a company’s distributable reserves.
Finally, a common issue on transaction structuring arises from the provisions concerning financial assistance. Broadly, these provisions say that it is illegal for a company to give financial assistance, directly or indirectly, for the purpose of acquiring its own or its parent company’s shares.
Under the Business Income Tax Act, corporations are taxed separately and no consolidated tax returns are accepted.
However, arrangements similar to group taxation are possible for tax-deductible group contributions for limited (liability) companies under certain conditions.
Group contributions (other than capital contributions, which are not deductible) can be credited between domestic companies from business income (not relating to the banking or insurance industries), where the contribution is not otherwise deductible from business income. To qualify, both companies must be resident in Finland and there must be at least 90 percent ownership, direct or indirect, from the
beginning of the tax year. Group contributions can be credited in both directions, from a parent company to a subsidiary and vice versa, as well as horizontally between sister companies. The criteria for indirect ownership can be fulfilled through a foreign company on the basis of the non-discrimination clause in the tax treaty with the country involved. Where a Finnish or non-Finnish company owns at least 90 percent of its Finnish subsidiaries, a group contribution can be effected between these subsidiaries, provided the other conditions discussed above are met.
The granted group contributions may not exceed the taxable income of the contributing company in the tax year. The contributing company must formally make the decision during the tax year in which the contribution is granted, but the actual payment can be made only when financial statement has been adopted by general meeting. The group contribution is tax-deductible only where the corresponding deduction is made in the books of the contributing company and where the receiving company books the contribution as its (taxable) income during the (tax) year in which it is deducted by the contributing company. At least a 90 percent group relationship must have prevailed during the entire fiscal year, and the financial years of the companies must end on the same day.
According to case law, a Finnish branch of a company resident in the EU may also receive and grant group contributions.
Arm’s length pricing must be followed in all intragroup transactions, including between Finnish group companies.
Group contributions granted by a Finnish group company to a dual resident company are not tax-deductible, so the losses of a dual resident company cannot be offset against profits of other Finnish group companies.
Foreign investments of a Finland target company
Finland’s controlled foreign company (CFC) legislation is designed to prevent Finnish companies from accumulating
profits offshore in low-tax countries. Unless the offshore
subsidiary is carrying on certain acceptable activities or meets other specified conditions, its profits are apportioned to its Finnish parent and subject to tax. Broadly speaking, subsidiaries situated in tax treaty countries or in the EU are not usually considered as CFCs
Advantages of asset purchases
Disadvantages of asset purchases
Advantages of share purchases
Disadvantages of share purchases
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