Secured Lending

Secured Lending

Finnish law allows a number of alternative methods for a legal entity to obtain financing by using some or all of its assets as collateral. However, a restrictive regime is applied under Finnish law to any financial assistance by a Finnish company in respect of acquisition financing involving shares in that company or any other group company. This is not discussed in this Overview.

Pledge on movable property
In principle, any type of movable property (including shares, other securities and receivables) may be pledged, with the exception of certain types of movable assets (eg, certain land transportation vehicles, aircraft and vessels), which may instead be subject to a specific fixed charge.

A pledge is based on an agreement between the pledgor and the pledgee. Under Finnish law, a pledge agreement is not subject to any form requirements; nor are any notarizations or other public approvals, consents or formalities required. There is no requirement to file or register an agreement of pledge with a court or public authority, or pay stamp duties or other official charges. An agreement of pledge may even be concluded orally. In practice, however, pledge agreements are always concluded in writing.

In order for a pledge to be valid and binding - not only between the pledgor and the pledgee, but also in relation to third parties, such as creditors and subsequent transferees of the pledgor - the pledge must be perfected. The pledge is perfected by the pledgor transferring physical possession and effective control over the pledged property to the pledgee, or an agent acting on behalf of the pledgee (and not on behalf of the pledgor). If the pledgor is not in possession and control of the pledged assets, the pledge may be perfected by the pledgor notifying the party in possession and control of the pledged assets of the pledging of these assets and passing the control of such assets exclusively to the pledgee.

The pledgee's possession and control over the pledged assets must be genuine for the pledge to be effective and enforceable. This means that paper arrangements which pledge the property to a pledgee by means of a pledge agreement, but which do not genuinely transfer the physical possession and/or effective control of the pledged property to the pledgee, have been nullified by the Finnish courts.

Pledge on shares
The pledging of shares is carried out and perfected in accordance with these principles. With respect to the pledging of shares issued by a private limited liability company, if no share certificates have been issued by the company such certificates should be issued and then delivered to the pledgee. The company's board of directors should also be advised of the pledging of the shares.

With regard to the pledge of shares that are registered in the Finnish book-entry securities system, which is mandatory for Finnish companies whose shares are quoted on the Helsinki Stock Exchange, the entire book-entry securities account on which the shares are recorded must be pledged, and the pledge properly registered in the system. If only part of the securities held in a book-entry securities account are to be pledged, such securities must first be transferred to another book-entry securities account, which must be then pledged in its entirety.

Pledge on receivables
The pledging of a receivable may also be carried out under a pledge agreement. In order to perfect the pledge, the debtor under the receivable must be notified of the pledge, including instructions to make payments under the receivable to the pledgee, instead of the pledgor. Finnish legal doctrine takes a restrictive view on the pledging of future receivables (ie, receivables that do not exist at the time of the pledge). The pledge of future receivables is generally regarded as effective between the parties, but not in relation to third parties - including other creditors of the pledgor.

If the parties are unable to identify the relevant future receivables, for example where a retailer undertakes to transfer or pledge all of its future trade receivables arising from the sale of goods to consumers, it is uncertain whether the transfer or pledge of such future receivables is binding between even the parties.

Enforcement of a pledge
The enforcement of a pledge on movable property (eg, paper-based and book-entry shares) is regulated by the limited provisions on pledges over movable property contained in the Commercial Code.

According to the Commercial Code, a pledge can be enforced if:

  • the secured claim is due for payment;

  • the pledgee, subsequent to the claim becoming due for payment, has notified the pledgor that unless payment is received within a set period of time, which may not be less than one month from the notification, the pledged assets will be sold; and

  • this period has elapsed and payment has not been received.

Finnish law does not include provisions regarding the means of enforcement. Therefore, the pledgee is free to choose whether the pledged assets are to be sold through a private transaction, public auction or other means. However, the pledgee must also consider the interests of the owner of the pledged assets and other possible interested parties, such as the secondary pledgee in the enforcement proceedings. In practice, this means that the pledgee would not, for example, be entitled to sell the pledged assets for a price that is substantially lower than their market value in the circumstances.

Some of these statutory rules may be waived by agreement between the parties concerned. In practice, it is customary to include detailed enforcement provisions in the pledge agreement. To the extent that such contractual provisions differ from the statutory provisions, the contractual provisions will prevail, provided they are not unreasonable. However, under the Contracts Act a term under which the pledgor automatically forfeits its title to the pledged assets on default of the secured liability is always void.

Pursuant to the Bankruptcy Code, a pledgee may enforce the pledge in case of the pledgor's insolvency through an auction procedure or other means. Since the Bankruptcy Code does not specify the means of enforcement, it may be freely chosen by the pledgee. However, the pledgee must also consider the interests of the bankruptcy estate. This means that the pledgee must use reasonable efforts to achieve the fair market price for the pledged assets in the circumstances. The pledgee is entitled to receive payment for his secured claim from the proceeds of the pledged assets with priority over any other creditors.

Floating charge
A registered business charge, similar to the English law floating charge, may be used in Finland as security for debt. A floating charge may be registered over the movable assets owned by a company and pertaining to the business of the company. Unlike the pledge on movable assets, the floating charge does not require the transfer of possession or control of movable property to the secured creditor. Promissory notes issued by the chargor company are used to create the floating charge, and to establish the size of the charge and internal priority between the chargees. Thus, the creation of a floating charge is technically very different from the English procedure. Registration of the floating charge in the register maintained by the National Board of Patents and Registration is required. Except for minor registration fees, no stamp duty or other public fees apply to a floating charge.

The floating charge covers, in principle, the following movable assets of the company:

  • machinery, equipment, constructions and other comparable capital assets;

  • raw materials, finished and semi-finished goods and other current assets;

  • cash, trade receivables, paper-based securities, book-entry securities and other financial assets;

  • trademarks, trade names, model rights, patents and other IP rights; and

  • lease rights, rights of use, rights of severance and other specific rights.

A floating charge covers all the relevant assets owned by the company at the moment of recording the floating charge and all subsequently acquired assets which can be subject to a floating charge.

On the other hand, assets subject to a floating charge may be used, sold or otherwise disposed of in the ordinary course of business of the company. Any assets so disposed of fall automatically outside the floating charge (provided that the sale has taken place in the ordinary course of business). Such transactions thus lead to fluctuations in the value of the assets subject to the floating charge. The assets subject to the floating charge are not individualized in any way.

However, the floating charge does not cover immovable property or any movable property that can be subject to a fixed charge under Finnish law. Thus, real estate, aircraft and vessels are statutorily excluded from the scope of the floating charge.

Assets subject to a floating charge may not generally be pledged separately. However, notwithstanding this general rule, paper-based securities, book-entry securities and receivables may be separately pledged. This can be a serious disadvantage to the holder of the floating charge.

In certain situations a creditor secured by a floating charge may claim payment under the floating charge, even where the receivable secured by the floating charge has not fallen due. The creditor is entitled to such premature payment where:

  • all of the assets or the business covered by the floating charge are sold or the business is discontinued;

  • all or most of the assets covered by the floating charge are destroyed (eg, in a fire); or

  • the company fails to take proper care of the assets, or the assets have diminished and due to this the creditor's security position has significantly deteriorated.

In the enforcement of a floating charge only 50% of the proceeds of the charged assets will be used to satisfy the holder(s) of floating charges, while the balance will be used to satisfy unsecured creditors of the debtor. To the extent that the holder(s) of the floating charge remains unsatisfied as a secured creditor, its claim becomes an unsecured debt.

As a result of the deficiencies of floating charges, including the fluctuation of the value of the assets subject to the floating charge, they are often considered to be an inadequate security in Finland. Thus, floating charges are often used in circumstances where the security holder also has the benefit of a fixed charge or is a pledgee of movable assets.

Fixed charge
A fixed charge is available under Finnish law in respect of all freehold properties and the buildings on them, as well as leasehold properties and the buildings on them, where the lessee is entitled to assign the lease rights without the consent of the lessor and the lease rights of the lessee have been registered in the Land Register. The creation of a fixed charge is subject to the form requirements of the Real Estate Code.

To create a fixed charge, the relevant court will, upon application, register the charge against the relevant property and issue a charge certificate for the amount of the fixed charge.

To constitute a fixed charge, the charge certificate is then pledged to the pledgee under a pledge agreement between the debtor (the pledgor) and the creditor (the pledgee).

No stamp duty or other taxes or public fees apply (except for minor registration costs).

The security position of the holder of the fixed charge is strong. The holder also enjoys the benefit of being able to enforce the fixed charge outside the bankruptcy proceedings of the chargor/pledgor.

In order for the creditor to collect a debt secured by a fixed charge, the creditor must first obtain an enforceable judgment under the debt. When such a judgment has been obtained, the creditor can apply to a bailiff for a forced sale of the charged real estate. The bailiff will then sell the real estate at auction and distribute the proceeds in accordance with the internal seniority of the chargees (ie, charge certificate holders).

It can be difficult to establish whether a construction on a charged property constitutes a building subject to the fixed charge or whether it is part of machinery subject to the floating charge. Similarly, it may be difficult to establish whether a piece of heavy machinery bolted to the floor of a building is part of that building and thus subject to a fixed charge, or whether it is simply a piece of machinery and thus subject to a floating charge.

Specific fixed charge
As stated above, certain types of movable assets, such as certain land transportation vehicles, aircraft and vessels may be subject to a specific fixed charge. A floating charge does not generally cover such assets.


Leasing is a well-established form of financing in Finland. Leasing services have traditionally been provided in Finland by credit institutions and their associated companies. However, increasing competition among independent leasing companies, including a number of non-Finnish companies operating on a cross-border basis, is apparent in today's market.

Domestic leasing agreements typically relate to low-value goods such as office equipment, vehicles, and IT and computer equipment. However, the use of leasing in financing the acquisition of aircraft, power plant equipment and other high-capital cost industrial equipment has become more common.

Legal framework
Neither leasing companies nor leasing agreements are specifically regulated in great detail. In the absence of specific regulations, general provisions of contract law and those on renting of movable property in the Commercial Code govern leasing contracts. The Commercial Code does not impose any form requirements on a leasing contract. The provisions of the Commercial Code can also be set aside by the provisions of a leasing contract, and therefore have limited relevance to the leasing industry. Specific legislation applies to leases of real property.

Apart from various tax and accounting considerations, one of the main legal considerations raised in connection with leasing relates to third-party rights and the lessor's security interest in the leased equipment. This area is not codified in written law, but is instead addressed in the general legal principles established by doctrine and case law.

True lease
In general terms, a lease constitutes a true lease where it cannot be re-characterized as a hire-purchase agreement (to which the Hire-Purchase Contracts Act applies) or as a security assignment.

Finnish law recognizes, generally, the 'substance before form' principle. Thus, an agreement titled as a lease or leasing agreement can and will be construed as a hire-purchase contract, if the commercial contents of the agreement so require. Accordingly, a leasing contract will be re-characterized as a hire-purchase contract where it is obvious under its terms that the purpose of the parties is to pass the title to the leased equipment to the lessee upon the expiry of the leasing contract.

An option for the lessor to sell the equipment to the lessee upon the expiry of the term of the lease, or an option for the lessee to purchase the equipment for a price less than the anticipated residual market value at the time of exercise of the option, may cause the re-characterization of the lease as a hire purchase. Further, if the term of the lease is equal to the full anticipated economic lifetime of the equipment, or if because of its specific nature the equipment has economic value only to the lessee, the re-characterization of the lease as a hire-purchase agreement is recommended by legal doctrine.

Because specific legislation applies to hire purchases, a re-characterization of a leasing contract as a hire-purchase agreement could affect both the commercial terms of the lease and the enforceability of the lessor's title to the equipment. Under the Hire-Purchase Contracts Act, a hire-purchase agreement (unlike a leasing contract) must also comply with certain criteria relating to form. If these criteria are not complied with, the seller (or in the case of leasing, the lessor) cannot exercise its rights under the contract to repossess the equipment. Leasing contracts often fail to meet these criteria and re-characterization of a leasing contract may result in the lessor forfeiting its security interest in the equipment.

Where the leasing arrangement qualifies as a true lease, the lessor will usually retain a valid title to the lease equipment during the term of the lease. This means that the lease equipment will not, as a rule, be subordinated to any third-party rights (eg, the rights of the creditors of the lessee). However, in order for the lessor to maintain a valid title to the lease equipment, it is of great importance that the relevant lease equipment:

  • can be adequately identified and is not mixed with similar assets of the lessee or a third party;

  • is not attached or otherwise integrated to another item in such a manner that the lease equipment may not be detached from that other item, or may not be removed from the other item without causing material financial loss; and

  • is not incorporated into a building or real property so that the lease equipment becomes a fixture of the building or real property.

If any of these prerequisites is not fulfilled, the lessor is likely to have forfeited its title to the equipment.

Tax treatment of leases
Finnish tax law does not include any specific provisions on leasing. The distinction between true lease and hire purchase is relevant for tax purposes. As there are no specific tax law provisions concerning leasing, it is recommended that an advance tax ruling is obtained prior to entering into a material leasing transaction.

In a true lease, leasing payments are generally (from a tax viewpoint) treated as rental income in the accounts of the lessor. Similarly, the lease payments made are treated as business expenses in the accounts of the lessee. Normally, the lease equipment is treated as a fixed asset in the balance sheet of the lessor and the acquisition cost of the lease equipment is depreciated in the accounts of the lessor.

A re-characterization of a leasing contract as a hire-purchase agreement will normally transfer the title to the lease equipment from the lessor to the lessee for tax purposes. This means that the lease equipment is treated as the current asset of the lessor. The aggregate lease payments of the lessee for the whole lease term are then treated as income of the lessor for the year when the leasing contract was concluded, and the acquisition cost of the lease equipment is considered as an expense of the lessor for the year the lease equipment was transferred to the lessee.

On the other hand, the lessee should capitalize the acquisition cost of the lease equipment and may thereafter make depreciations on it. The lease payments paid by the lessee to the lessor are considered to be part-payment of the purchase price of the lease equipment, and are consequently not deductible in the lessee's accounts.

Cross-border leasing
The legal questions, including tax issues, relating to a cross-border lease can be even more complicated than those raised in connection with a purely domestic lease, especially as legal concepts introduced in a leasing contract governed by the laws of a foreign jurisdiction may not be recognized in Finnish contract or tax laws. Finnish bankruptcy laws, and other laws affecting creditors rights generally, may also become applicable irrespective of the choice of law.

Where the lessee is Finnish, the non-Finnish lessor should ensure that the title to the equipment is recognized under Finnish law. The enforceability of the set-off or automatic termination provisions in the leasing contract may also be relevant. Further, the enforceability of any security interests created over the lease equipment for the benefit of a non-Finnish lessor must be carefully addressed.

From the Finnish tax point of view there is no difference between pure domestic leasing and cross-border leasing. However, inter-related parties should always remember that the arm's-length principle must be followed in their internal leasing arrangements. Finnish tax authorities may, for example, disqualify the deductibility of excessive lease payments made by the Finnish subsidiary company to the non-Finnish lessor parent company.

With regard to the Finnish taxation of lease payments made to a non-Finnish lessor, according to Finnish tax law provisions a non-Finnish lessor is only taxed in Finland on income derived from a permanent establishment located in Finland. Further, a 1986 decision of the Supreme Administrative Court has held that the mere presence of leasing assets in Finland of a foreign lessor does not constitute a permanent establishment in Finland.

Cross-border leasing arrangements may aim purely at tax benefits, for example in so-called 'double-dip' (or 'triple-dip') leasing arrangements. Because the Finnish tax authorities apply the 'substance before form' principle and tax treaties do not address such arrangements, there is always a risk that such an arrangement is not permissible for taxation purposes if it has no sound commercial grounds to support it and its sole purpose is to obtain tax benefits.

Sale and lease-back
Under a similar concept as a true leasing transaction, a sale and lease-back transaction may be re-characterized as a loan and security assignment of the asset if the parties are held to have effectively agreed on the return of the title to the asset to the lessee upon the expiry of the lease term. Where a sale and lease-back transaction is re-characterized as a security assignment, the title to the asset is considered to belong to the lessee.

Further, although re-characterized as a security assignment, the lessor may nevertheless lose his security interest in the lease asset. This is due to the fact that for the creation of a valid security interest over the lease asset, Finnish law requires the transfer of the physical possession and control of the asset to the lessor in order that the arrangement meets the criteria of a pledge, or in the case of certain land transportation vehicles, aircraft and vessels, a registration of a fixed charge over the equipment in favour of the lessor. Neither of these requirements are usually met in a sale and lease-back transaction.

For further information on this topic please contact Lauri Peltola, Irina Mikkola or Niklas Thibblin at Waselius & Wist by telephone (+358 9 668 9520) or by fax (+358 9 668 95 222) or by email ([email protected]).