Industrial & Manufacturing groups which have operations in Finland, should review their funding arrangements to ensure they remain tax effective following a recent case in Finland which may now be put on a statutory footing.
The Finish tax authorities treated a hybrid instrument as equity and the related interest expense was treated as non-deductible in its entirety. The taxpayer disputed this treatment and won its case in the Court of Appeal and in the Supreme Administrative Court.
Facts of the case
A Finnish company had obtained a loan of 15 MEUR from its parent company in Luxembourg in 2009. The company claimed a tax deduction for the interest incurred in 2009. The Luxembourg parent company had granted the financing based on the requirements of the banks that had financed the Finnish operative entity. According to the decision, the banks required the intra-group financing to be subordinated. In addition, they required that the hybrid instrument in question should be treated as equity for IFRS purposes. The loan did not have a maturity date or collateral. The fixed annual interest rate was 30% and the accrued interest was added to the capital. The loan could only be repaid at the initiative of the debtor. The Tax Administration claimed non-deductibility based on a characterisation as equity. The decision of the Supreme Administrative Court confirmed the debt characterisation of the hybrid instrument and that existing legislation did not support recategorisation. The Supreme Administrative Court returned the case to the Tax Administration for an assessment of the arm’s length level of the interest which could be treated as deductible.
As a consequence, the Ministry of Finance issued a draft for a parliament proposal to allow the tax authorities to treat all interest on such instruments as non deductible. The proposal raised strong objections (except from the Tax Administration) in the public hearing considering the change which ended in February 2015.
It is likely that the Finish President will nominate a conservative Government where the Prime Minister will be Juha Sipilä. This may mean the proposed change to the legislation in relation to hybrid debt instruments may not be implemented straight away. However, because of the Base Erosion & Profit Shifting or BEPS initiative and the current budget deficit in Finland there will be pressure to take some action. The Finish budget process in autumn 2015 may consider this. Industrial & Manufacturing companies with funding structures in Finland, should therefore review such structures to ensure they remain tax effective in Finland, in anticipation of the new proposal being implemented.