The Ministry of Finance published the final government proposal for Finland’s new interest deductibility restrictions on 27 September 2018. The technicalities of the proposal are for the most part in line with the earlier draft proposal published for discussion purposes at the start of the year. However, the final proposal includes some changes and specifications that should make life for Finnish entities easier.
- Similar to the current regulatory situation, the new regulations include a 500,000-euro safe-haven threshold under which net interest expenses are always deductible.
- Furthermore, there is a 3,000,000-euro safe-have threshold applicable to the deductibility of interest (such as interest for bank loans).
- A company will also be entitled to deduct net interest expenses to the extent that they are less than 25% of the taxable EBITD of the company.
- As in the model published at the beginning of the year, the concept of interest is still defined expansively to cover payments relating to debt financing. Expenses considered to be interest in this sense include costs and payments ancillary to borrowing, such as guarantee and insurance fees as well as handling charges, credit fees and loan commissions. Payments for services not related to arranging the loan would not be considered interest (e.g. advisory fees relating to the structuring of financing and assisting a company in arranging financing).
- Independent companies are also carved outside the scope of regulation. Independent company refers to a company i.a. having no shareholders with at least 25% ownership stake or control in that company, and the company neither having holdings of at least 25% in any other entity.
- Contrary to existing provisions, new interest deduction limitation regime will apply to all Finnish corporate entities (including real estate companies).
Key Changes to Earlier Draft Proposal
- As opposed to the draft government proposal published at the beginning of the year, the new proposal will exclude interest expenses from the scope of the restriction deductibility to the extent that they accrue from third party loans taken out prior to 17 June 2016. If the terms of the loan have been amended after this date, the interest expenses will fall within the scope of the restrictions to the extent they are allocated to the amended terms. Furthermore, the restrictions of deductibility of net interest expenses are not applicable to net interest expenses of third party companies that have been included in the acquisition cost of an asset or activated in taxation prior to 1 January 2019.
- In the future, interest deduction limitation regulation will not be applied to financial companies listed in the new regulation. Such companies include investment firms covered by definition of MIFID regulations, alternative investment funds (regardless of whether their alternative investment fund managers are licensed or registered), insurance companies and pension institutions.
- As opposed to the draft government proposal published at the beginning of the year, the current type balance sheet exception would be included in the regulation. However, the balance sheet exemption rule would be tightened, as the adopted consolidated balance sheet would have to be presented as a conversion as if it had been compiled using the same standards as the taxpayer's balance sheet. The government proposal also directly states that utilizing the balance sheet exemption would not be possible for unused net interest expenses carried over from previous years.
- Unutilized net interest expenses would form two separate categories in the future. The deduction mechanism as such would function to a large extent in the same way as currently, but the safe-haven thresholds mentioned above (EUR 500,000 and EUR 3,000,000) would set the limits for the deduction of each type of net interest expenses.
- The possible exemption for companies involved in infrastructure projects is proceeding into further drafting. However, new regulation would not in current form apply to interest payments for subsidized loans of certain housing construction projects financed with such subsidized loans.
The interest deductibility restrictions set forth in the published government proposal include the kinds of relief that many of parties wanted, the most important of which are likely to be the exemption for defined finance companies and the retention of the balance sheet-based exemption.
However, there are still problems in the proposed provisions, such as possible difficulties in using intra-group net interest expenses carried over from previous years, and the narrow scope of the exemption for old loans. Furthermore, the definition of financial expenses that are considered interest in this sense is still quite unspecified. Application of the balance sheet test could also prove difficult for Finnish companies which are a part of multinational groups.
The government proposal will next move on to Parliamentary hearings. According to the proposal, the new regulations would first be applied to taxation for fiscal year 2019.