October 2, 2018 Finland publishes new interest deduction limitation rules to be effective as of 1 January 2019 The Finnish Ministry of Finance has issued a government bill (the Bill) on the new interest deduction limitation rules resulting from the European Union (EU) Anti-Tax Avoidance Directive (ATAD). The new interest deduction limitation rules will be applied to financial years ending on 1 January 2019 or later. They significantly expand and tighten the scope and effect of the Finnish interest deduction rules as of 2019. The key points of the Bill include:
The new rules would be applied to both related and non-related party net interest expense. The definition of related party would remain the same as in the current rules (e.g., 50% ownership). The rules would also apply to all income baskets and therefore e.g., real estate companies and mutual real estate companies (MRECs) would be affected by the new rules. In general the new rules would not apply to financial institutions. The definition of interest expense would change. All expenses derived from the raising of finance would be considered as interest expense. The definition of interest expense and interest income would be symmetrical. Leasing payments or charges for financial costs would not be considered as interest expense or income. Deductible and non-deductible net interest expense According to the Bill, net interest expense would continue to be deductible to the amount of 25% of the tax EBITD. The tax EBITD would be calculated similarly to the current regulation by adding back interest expenses, tax depreciations and net group contribution to the taxable profit/loss before applying the interest deduction limitation. The interest deduction limitation would continue to be applied only if the net interest expense exceed €500,000. Non-related party net interest expense would be deductible up to €3 million, and they would be deducted primarily as part of the 25% tax EBITD quota. The non-deductible net interest expense could be carried forward without time limitation similar to current rules. The non-deductible amount would be transferred in the case of possible mergers or de-mergers. Exceptions The new interest deduction limitation rules would have several exceptions. The equity ratio based rule would remain, which means that the taxpayer's interest deduction would not be limited provided that the equity ratio of the taxpayer is higher than the equity ratio of the group. If the consolidated balance sheet has been prepared using partly or completely different rules (accounting standards) than the taxpayer's balance sheet, the equity ratio based rule could only be applied if the consolidated balance sheet could be adjusted so that it would correspond to the rules used to prepare the taxpayer's balance sheet. The new rules would not apply to non-related party interest expenses from loans (e.g., bank loans) obtained before 17 June 2016. The exception would not apply to later changes of the loans which would affect the amount of the loan or the loan period. The rules would also not be applied to interest expenses which have been activated before 1 January 2019. Generally, the rules would not be applied to financial institutions. However, there would be some changes to the exception. For example investment companies, such as real estate companies, which are fully owned by pension funds would be exempt from the new rules. Based on the so-called infrastructure exception the new rules would not apply to social housing projects which have received interest subsidies. According to the Bill, the expansion of the infrastructure exception will be further discussed taking into account the special characteristics of the energy industry. Impact on companies In the future, companies should track the amount of related and non-related party net interest expense separately in more detail. The new rules would also apply to real estate companies. ——————————————— For additional information with respect to this Alert, please contact the following: Ernst & Young Oy, Helsinki
Ernst & Young LLP, Nordic Tax Desk, New York
——————————————— PDF version of Tax Alert 2018-1935
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