As the international economic climate becomes more uncertain, pressures mount in many countries to collect more taxes. This, in turn, means that the lawyers of Roschier’s Tax and Corporate Structuring practice have their work cut out for them.

When Roschier’s lawyers work on corporate transactions, such as acquisitions, mergers, joint ventures, internal reorganizations and refinancing arrangements, tax experts are included in the team. “We also assist our clients with various other tax issues. Lately, for example, there have been several transfer pricing disputes,” says Mika Ohtonen, who heads Roschier’s Tax and Corporate Structuring practice in Finland.

This year the team has also been kept busy examining the implications of a new Finnish tax bill that affects many international companies and investors.

Restrictions ahead for deductibility of interest

“Finnish tax legislation has traditionally offered tax planning opportunities with regard to cross-border acquisition financing,” Ohtonen says. “In general, there is no withholding tax on interest paid to non-resident companies. Also, no thin capitalization legislation or similar restrictions on the deductibility of interest expenses has been imposed.”

Ohtonen points out, however, that Finland has well-functioning anti-avoidance regulations. “There already are tools to challenge non-arms-length-based transactions, and the system as such works quite well.”

Nevertheless, this is set to change. In 2012 the Finnish Ministry of Finance rushed through a bill concerning rules restricting deductibility of interest. The new legislation entered into force in January 2013 and will be applicable to the fiscal year 2014.

The bill met with fervent criticism, and some alterations were made. Mika Ohtonen was involved in two lobby groups that submitted their comments. “One of the positive changes was that the legislation will not apply to companies that are not taxed according to the Business Income Tax Act, such as housing and real estate companies which are traditionally highly leveraged based on other than tax reasons,” Ohtonen says.

“An equity to assets test was also introduced. A Finnish company’s equity to assets ratio can be compared to the ratio of the consolidated group, and provided the ratio of the Finnish company would be equal to or greater than the ratio in the consolidated group, the restrictions do not apply.”

“However,” Ohtonen adds, “the ratio shall be based on the financial statements of the ongoing fiscal year, the outcome of which can be difficult to predict.”

According to Ohtonen, although the final bill is an improved version of the first proposal introduced in April 2012, there is still plenty of room for criticism. “Basically, despite the amendments to the first proposal, Finland will have one of the most stringent restrictions on deductibility of interest in the EU,” Ohtonen says.

One of the issues Ohtonen is not happy with is the 500,000 euro net interest expense limit. “It is too low – we tried to lobby for a limit of 2 million euros, which would be high enough to leave most mid-sized companies out. Also, I find it too harsh that if the limit is exceeded even by one euro, the whole amount of interest may under certain circumstances be non-deductible.”

According to Ohtonen, the original idea was to restrict leveraged transaction structures in which aggressive tax planning played a key part. “But what we have now is something that will also affect companies whose debt is motivated clearly by the underlying business, not tax-based leverage structures.”

In this respect the bill is different from the new Swedish legislation on interest deductions, which entered into force on 1 January 2013.

”Generally, the Swedish legislation applies only on interest on debt to low-taxed recipients or otherwise where the debt is mainly motivated by tax purposes,” says Daniel Jilkén, head of Roschier’s Tax & Corporate Structuring practice in Sweden.

“Thus, Swedish taxpayers are normally in a position where they may deduct interest if they show sound business reasons for their indebtedness.”

“However,” Jilkén continues, “the problem for Swedish taxpayers is that it is not clear what should be considered motivated by tax purposes and what should be considered sound business reasons. This is troubling as the issue will probably not be resolved in case law before the rules have been replaced with new, more permanent rules in 2015 or 2016.”

Not a good idea to rush

One of the amendments in the new Finnish bill compared to the first proposal is the timetable. According to the initial proposal the new legislation was meant to apply as of the beginning of the fiscal year 2013, which would have left companies with very limited time to make necessary changes to their capital structures. “Now the commencement of the applicability has been pushed further to fiscal year 2014. This is better, but those companies whose fiscal year ends in January 2014 will still need to react promptly to make sure that they will not be subject to double taxation,” Ohtonen warns.

Ohtonen is worried about the impact that changing capital structures will have on bank financing. “Usually covenants prohibit such changes, so there will be a need to renegotiate loans.”

“Furthermore”, he adds, “it is not entirely clear, which types of loan arrangements can lead to a bank loan being re-evaluated as an internal loan.”

“What everyone hoped for is that restrictions would have been delayed until later. The proposal simply does not work with the current tax system, especially when it comes to our group contribution rules. There is currently a committee working on an extensive reshaping of corporate taxation, and it would had made sense to wait for their suggestions prior to executing the proposal, especially as the suggestions now seem to be delayed,” Ohtonen points out.“What everyone hoped for is that restrictions would have been delayed until later. The proposal simply does not work with the current tax system, especially when it comes to our group contribution rules. There is currently a committee working on an extensive reshaping of corporate taxation, and it would had made sense to wait for their suggestions prior to executing the proposal, especially as the suggestions now seem to be delayed,” Ohtonen points out.

“But of course we have been preparing for the rushed timetable and discussed options with clients,” he adds. “When it comes to these types of changes, it is good for clients to think ahead,” Ohtonen concludes.

“What everyone hoped for is that restrictions would have been delayed until later. The proposal simply does not work with the current tax system, especially when it comes to our group contribution rules. There is currently a committee working on an extensive reshaping of corporate taxation, and it would had made sense to wait for their suggestions prior to executing the proposal, especially as the suggestions now seem to be delayed,” Ohtonen points out.

“But of course we have been preparing for the rushed timetable and discussed options with clients,” he adds. “When it comes to these types of changes, it is good for clients to think ahead,” Ohtonen concludes.