All questions

Local developments

i Entity selection and business operations

Finland has a residence-based tax system: Finnish tax residents are subject to Finnish taxation on their worldwide income, whereas Finnish non-tax residents are subject to Finnish taxation only on their Finnish-source income (as defined in national law). Legal persons are Finnish tax residents if they are registered in Finland or if they are established under Finnish laws. Differently from the tax systems in many other countries, place of effective management does not create tax residence in Finland.

Taxable income for all entity types is assessed separately under three different acts, depending on if the source of the income is business, farming or other activities. Losses from one source of income may not be offset against another source of income, apart from rare exceptions. The Finnish parliament has approved an amendment, which simplifies the system somewhat by providing that most corporations are taxed exclusively under the business income source as of tax year 2020.

Generally, the provisions applicable to the entity type at hand are decisive and there are very limited possibilities for a taxpayer to choose how it is taxed (e.g., check the box). There is just one clear exception - the housing real estate investment trust (REIT) regime. There are also no patent boxes or other similar tax regimes. Instead, the comparatively modest corporate income tax rate is Finland's straightforward advantage in terms of international tax competition.

The most common entity type is the corporation. Corporations are legal persons and tax subjects, meaning that they are subject to corporate income tax on their profits. Upon distribution of such profits, there is another band of taxation on the shareholder level. Significant advantages of corporations include, subject to additional requirements, availability of group contribution (a form of group taxation) and participation exemption on capital gains.

The mutual real estate company (MREC) is a corporation, whose purpose is to own a building and whose shares give its shareholders the right to possess its building. As the right of possession is with the shareholders, the shareholders sign the rental agreements with tenants and the tenants pay rent directly to the shareholders. The articles of association require shareholders to pay maintenance and other fees to the MREC to cover the MREC's costs. The fees are typically set to a level, which leaves the MREC with either no profit or modest profit, which is subject to normal corporate income tax. The MREC is a deviation of the fundamental principle that transactions between a corporation and its shareholders be at arm's length. It also seems to be quite distinctive for Finland.

Branches (permanent establishments) lack legal personality, but they are subject to Finnish corporate income tax on their profits. The calculation of these profits requires attribution of income and expenses to the branch, which may increase administrative burden and the risk of double taxation, as it is possible that tax authorities disagree on the attribution. In practice, branches are mostly used for regulatory reasons, for example, within the financial sector.

Limited partnerships are legal persons. They are not tax subjects, meaning that no income tax is payable on the limited partnership level. The taxable profit is calculated on the limited partnership level and then apportioned to be taxed on the partner level in accordance with the limited partnership agreement. Hence, limited partnerships are frequently used by private equity fund investors and in other circumstances where flow-through taxation is desirable, for example, because different kinds of investors are subject to different kinds of taxation (corporation, pension fund, private person, etc.).

A curiosity within the Finnish fund environment is the housing REIT regime. This regime has since 2009 given Finnish corporations the possibility to elect exemption from corporate income tax. However, exemption comes with a handful of requirements including that the corporation must, for example, be publicly listed, invest in housing and distribute almost all of its realised profits annually. It could be said that the Finnish REIT regime has been a failure, because only one REIT has ever existed and even that has given up its tax exemption. In practice, investments in real estate are made through other vehicles such as tax-exempt investment funds, unlisted or listed corporations or limited partnerships, which are more flexible.

Finnish investment funds are contractual and may be divided into normal and special investment funds. Investment funds lack legal personality and their activities are carried out by a separate management company. Currently, investment funds are automatically exempt from corporate income tax. As of tax year 2020, they will have to meet certain conditions related to, for example, a minimum number of unit holders and open-endedness to maintain tax exemption.

Finnish courts have struggled to treat foreign funds in a non-discriminative manner as compared to Finnish funds. This is largely because Finland does not have corporate funds and the Finnish tax model builds on income tax exemption on the investment fund level. A legislative change should bring clarity to existing patchy case law as of tax year 2020 by setting out precise criteria for when foreign funds are granted the same tax treatment as Finnish funds. Unfortunately, there are still doubts as to whether or not the new law will actually be compliant with the EU freedoms, as Finland would continue to subject all foreign corporate funds to tax based on their legal form even if they were functionally similar to Finnish tax-exempt (contractual) funds.

ii Common ownership: group structures and intercompany transactions

There is, as such, no tax consolidation in Finland, and even if a corporation belongs to a group, it is taxed as a separate entity. Pricing between related parties should be at arm's length, both in a national and an international setting.

Group contribution - a tax-deductible expense for the payer and taxable income for the payee - is the Finnish instrument that most closely resembles tax consolidation. A traditional requirement of group contribution has been that both corporations are taxed under the business income source, which has, in practice, ruled most mutual real estate companies, real estate holding companies and personal holding companies out of its scope. The scope of potential uses will broaden significantly as of tax year 2020, when most corporations will be taxed under the business income source.

Additional requirements of group contribution include that both the payer and the payee are Finnish corporations with at least 90 per cent direct or indirect ownership. The availability of group contribution may be uncertain where this ownership requirement is met through a common foreign parent company. Hence, it could make sense to plan for the common parent company to be Finnish or to make one Finnish corporation the parent of the other.

As for cross-border group contribution, there is one Supreme Administrative Court ruling from 2007 where a Finnish company was not allowed to pay deductible group contribution to its foreign sister company with final tax losses. A 2013 ruling allowed cross-border transfer of final tax losses to Finland in a cross-border merger. Overall, the legal situation is uncertain, but arguably cross-border utilisation of tax losses should be allowed either through group contribution or merger, provided that the losses are final. In fact, in February 2019 the Commission sent a letter of formal notice to Finland, urging it to align its rules on group contribution with EU law.

Dividends between Finnish unlisted corporations are generally exempt without minimum holding requirements. Also dividends received by a Finnish corporation from an unlisted corporation within the EU or EEA may benefit from a dividend participation exemption without a minimum holding requirement, if the dividend-distributing corporation is liable to pay at least 10 per cent tax on its profits or its corporate form is one intended in the EU parent-subsidiary directive. In practice, most Finnish tax treaties exempt dividends from treaty countries, provided that the Finnish recipient company has at least 10 per cent of the payer company's votes. Overall, Finnish dividend taxation is very complex.

There is a participation exemption also on gains on sales of shares, which belong to the selling company's capital assets of the business income source and of which the selling company has owned at least 10 per cent for an uninterrupted period of at least one year. The participation exemption is not available to private equity investors or if the sold company has substantial real estate holdings or is located in certain, mainly non-treaty, countries. Groups would typically plan to take advantage of the participation exemption upon a potential exit.

However, in the case of a capital loss, it would be more beneficial not to meet the criteria for participation exemption, because a loss on a sale that would have qualified for exemption is non-deductible. In addition, if the shares are capital assets but the other requirements for exemption are not met, a loss would be deductible only against taxable gains on capital asset shares and only in the following five tax years (ring-fencing).

In some cases, it could be feasible to structure share ownership to benefit from a foreign participation exemption regime that is broader than the Finnish one. This could potentially also give rise to transfer tax savings if the future buyer is not tax resident in Finland. However, this strategy has pitfalls, especially in cases involving Finnish real estate.

Finland prevents tax avoidance with a variety of anti-avoidance rules. These include the interest deduction limitation rule, the controlled foreign company (CFC) rule, the general anti-abuse rule (GAAR) and, in a sense, the arm's-length principle.

As a general rule for outbound dividends, withholding tax rates are higher for recipients in non-EEA and non-treaty jurisdictions. In this regard, it has been a simple strategy to repatriate profits to a non-EEA (ultimate) parent company through an intermediate EU or EEA holding company. This has required that the country of the EU or EEA holding company does not levy withholding tax on dividends paid to the non-EEA country of the (ultimate) parent company, and that the dividend distribution from the Finnish company to the EU or EEA holding company can be made exempt from tax. However, this kind of arrangement will likely be challenged more frequently based on recent EU law developments and the principal purpose test, at least if the substance of the EU or EEA holding company is light.

What is quite noteworthy is that Finland does not, as a matter of national law, currently levy withholding tax on most kinds of interest payments to non-residents. Finland also does not have express capitalisation requirements. However, the opportunities to push down debt to Finland, especially in connection with intra-group transactions, are very limited, and Finland has already since tax year 2014 applied an interest deduction limitation rule to, among others, Finnish corporations, branches and limited partnerships. The interest deduction limitation rule had to be broadened to cover external loans and all income sources as of tax year 2019 because of the EU anti-tax avoidance directive (ATAD) I.

The current interest deduction limitation is astonishingly complex. As a brief introduction, deductions for net interest expenses paid to associated group entities are capped at €500,000 or, if the total net interest expenses (to associated group entities and external parties) exceed €500,000, up to 25 per cent of tax EBITD (also for the part not exceeding €500,000). Net interest expenses paid to external parties are deductible up to €3 million (safe harbour), even in cases where the 25 per cent of tax EBITD rule would mean a lower deduction or the total net interest expenses would exceed €3 million. Net interest expenses may also be deducted for the part exceeding the limit of €3 million within the 25 per cent of tax EBITD rule. Net interest expenses paid to associated group entities are deducted after any net interest expenses paid to external parties.

External loans may in some situations be treated as loans taken from associated group entities, causing them to be subject to stricter limitations. Such tainting may occur, for example, in back-to-back financing through an external lender or where a related party has given its receivable as security for an external loan. In practice, it may be quite difficult for a debtor to reach an agreement with a financier to carve out related party receivables from the security package.

Groups could multiply the mentioned thresholds by allocating debt to multiple group companies as the limitation applies on the entity, not group, level. Alternatively, they could attempt to benefit from the balance sheet test, according to which the limitation does not apply at all if the taxpayer's equity to total balance sheet ratio is higher than or equal to the equivalent consolidated balance sheet ratio. It is also worth noting that net interest expenses for which deductions have been denied under the interest deduction limitation rule may be carried forward indefinitely and deducted within the limit of each year.

Finland introduced a CFC rule in 1995. It has thereafter been amended numerous times, mainly because it has been in conflict with EU law. The most recent amendment was implemented because of the ATAD I as of tax year 2019. In practice, very few foreign entities are subject to CFC taxation, which is well in line with the rule's express objective - prevention.

Under the current CFC rule, Finland taxes the income of a foreign entity if a Finnish taxpayer, either alone or together with its related parties, has, directly or indirectly, at least 25 per cent of votes, ownership, right to capital or right to profits or assets, and the foreign entity's effective tax rate is less than three-fifths of that calculated under the Finnish rules. An entity within the EEA may escape the CFC rule if it carries out actual economic activities. An entity outside the EEA may also escape the CFC rule, but it must meet more criteria.

Strictly speaking, Finnish tax law rarely makes a difference between intra-group transactions and third-party transactions. Hence, for example, a tax-deductible loss may equally be incurred between external or related parties. However, intra-group transactions are, in practice, subject to closer scrutiny than transactions between unrelated parties and more likely to be found artificial or abusive and therefore disregarded under the GAAR. Alternatively, their price could be found against the arm's-length principle.

The Tax Administration may make a transfer pricing adjustment if related parties (roughly defined as over 50 per cent ownership or votes, etc., or actual control) deviate from arm's-length pricing and the deviation leads to lower taxable income or higher loss in Finland. The Supreme Administrative Court has concluded in its 2009 ruling that no transfer pricing adjustment can be made on an underpriced sale of shares within the group, if the participation exemption is applicable (leading to exempt gain or non-deductible loss).

iii Third-party transactions

The differences in tax treatment between share deals and asset deals are often an important consideration in structuring third-party transactions even if in practice most deals are carried out as share deals. To name a few differences, only share deals may benefit from the participation exemption discussed above. Transfer tax is typically payable in share deals, whereas transfer tax is payable in asset deals only if the sold assets include shares or real estate. Deductible goodwill may be achieved only in asset deals.

Finland has rules stemming from the EU merger directive on tax-neutral mergers, demergers, partial demergers, transfers of assets and exchanges of shares. These may be carried out intra-group, for example, to simplify the group structure, or as third-party transactions if it is commercially feasible that the counterparty remains a shareholder after the arrangement. The main benefit is deferral of direct income tax consequences until the next non-tax neutral disposal.

Tax neutrality is subject to multiple conditions, one of them being that the recipient corporation gives its newly issued or treasury shares as consideration for the transferred assets or liabilities. In mergers, demergers, partial demergers and exchanges of shares, cash consideration is allowed for up to 10 per cent of the nominal value of the consideration shares or, if the shares have no nominal value, of the amount recorded in the share capital for the consideration shares. The arrangement is always treated as a taxable transaction for a shareholder to the extent that the shareholder receives cash consideration.

In a tax-neutral merger, the merging company's assets and liabilities transfer to the receiving company and the merging company ceases to exist. There are also combination mergers, which is essentially two companies merging to a newly established company.

In a tax-neutral demerger, the demerging company transfers all its assets and liabilities to two or more existing or newly established companies and the demerging company ceases to exist. In a tax-neutral partial demerger, the demerging company transfers an independent business to an existing or newly established company and the demerging company continues to exist with at least one independent business. In practice, a demerger may be easier to implement than a partial demerger because there is no independent business requirement, which is subject to interpretation and should therefore be separately confirmed through an advance tax ruling procedure.

In a tax-neutral transfer of business, the transferring company transfers an independent business to an existing or newly established company. An advantage compared to a partial demerger is that there is no requirement to leave an independent business in the transferring company. The general difference between partial demerger (or demerger) and transfer of business is that in a transfer of business the transferee company will be owned by the transferring company but in a partial demerger by the demerging company's shareholders.

In an exchange of shares, a company acquires an amount of shares that entitles it to a majority of the votes in the target company or, if the acquiring company already has a majority of the votes, increases its ownership. An exchange of shares is the only tax-neutral arrangement where the acquiring company can receive a step-up in tax basis. Downsides of an exchange of shares include transfer tax of 1.6 per cent or 2 per cent on the value of the shares and an exit tax for natural persons.

As a main rule, a corporation may carry forward its tax losses for 10 years. However, this right may be lost under one of the two Finnish tax loss forfeiture rules.

Under the first general rule, applicable among others to share sales, tax losses carried forward are forfeited if at least half of the shares have changed owners during or after the loss year. If such change of ownership has occurred in an entity that holds at least 20 per cent of the owner of the loss-making company, then all the shares of the owner of the loss-making company are deemed to have changed owner. Ownership changes on higher levels in the ownership structure do not forfeit the right to utilise tax losses, which may present a structuring opportunity. There is no exemption for intra-group transactions.

A dispensation may be sought from the Tax Administration, either before or after the change of control, to retain the right to utilise the tax losses that would otherwise be forfeited. In practice, a dispensation can usually be obtained where the losses are needed to continue the business and the transaction is not motivated by the tax losses.

The second tax loss forfeiture rule applies to losses of merging and demerging companies. Upon a merger or demerger, the recipient company may deduct the merging or demerging company's tax losses if the recipient company or its shareholders have held at least 50 per cent of the shares of the merging or demerging company as of the beginning of the loss year. There is no possibility to apply for dispensation. There is also, as such, no exemption for intra-group transactions, although the ownership criterion for survival of losses clearly has similar elements.

iv Indirect taxes

Transfer tax is generally payable on Finnish shares if at least one of the parties to the transfer (seller or buyer) is a Finnish tax resident (or, more rarely, a local branch of a foreign financial institution). If the target of the transfer is Finnish real estate or shares of certain real estate companies, the transfer is subject to transfer tax even if neither of the parties is Finnish tax resident. Transfer tax may also be payable on foreign securities if more than half of the company's assets, directly or indirectly, comprise Finnish real estate and if at least one of the parties to the transfer (seller or buyer) is a Finnish tax resident. No transfer tax is payable on listed shares if the transaction meets requirements such as being conducted via securities brokers.

The applicable tax rates are 1.6 per cent for securities, 2 per cent for shares in certain real estate companies and 4 per cent for real estate. The tax is generally calculated on the purchase price and the value of any other consideration, but also on certain other payments and liabilities as quite ambiguously defined in the Transfer Tax Act. The Supreme Administrative Court is expected to confirm in the near future, if, for example, refinanced bank loans should be included in the tax base. The transfer tax is customarily paid by the buyer, although the Finnish-resident seller may have a liability to withhold the tax when the buyer is non-resident.

As an EU Member State, Finland levies VAT on the sale of most goods or services. The general rate is 24 per cent. In addition, there is a reduced rate of 14 per cent on, for example, groceries and restaurant services, and another reduced rate of 10 per cent on, for example, books, pharmaceutical products and passenger transport. Finland applies an insurance premium tax of 24 per cent on certain insurance premiums. Finland also has various excise duties on, for example, electricity, cars, fuels, soft drinks, alcohol and tobacco.

Sale shares are exempt from VAT and exemption is usually achievable in asset deals. Even if exempt from VAT, there may be, depending on the circumstances, possibilities to deduct VAT on transaction costs.