Recent case law from Finland's supreme administrative court and the central tax board

Factoring Deemed to Be Collection of Claims Subject to VAT

The Supreme Administrative Court has issued a decision on 19 August 2013 (KHO:2013:129) on the treatment of factoring in value added taxation. In its judgment, the Supreme Administrative Court deemed that a company that was acquiring invoices from its customers and bore the credit loss risk for the debtors' defaults was liable to pay value added tax on the fees it levied on its customers, namely an annual fee, invoice-specific administration fee and commission percentage based on the claim amounts.

This interpretation deviates from previous practice, where factoring has been deemed to be VAT-exempt financing activity. The collection of claims not linked to factoring has already been treated as activity subject to VAT before this Supreme Administrative Court decision. Based on this decision, factoring will be fully treated as VAT-liable collection activities and not as a VAT-exempt financing service. This means that factoring companies will also have the right to VAT refunds for factoring-related acquisitions.

Subordinated Loan Notes Not Deemed Securities Under the Asset Transfer Tax Act

On 25 June 2013, the Supreme Administrative Court gave a decision (KHO:2013:114) in which it took a position on whether subordinated loan notes are to be deemed securities as referred to in the Asset Transfer Tax Act, and therefore whether the transfer of such notes is subject to tax.

In the case, the interest on a subordinated loan was paid during the first four-year loan period based on an interest rate that at the start of the interest period was 12-month Euribor plus four percentage points. Interest during the loan period consisting of the fifth and following years was paid based on the rate of 12-month Euribor plus four percentage points in the event the debtor company's operating profit according to the previous adopted financial statements was less than ten per cent of the turnover or on the rate of 12-month Euribor plus six percentage points in the event that the debtor company's operating profit was ten per cent or more of the turnover.

The Supreme Administrative Court upheld the Administrative Court's decision. The Administrative Court had deemed that subordinated loan notes could not be deemed securities under the Asset Transfer Tax Act, and the transfer of such notes was not, therefore, subject to tax, because the interest on the loan was not directly determined on the basis of the company's operations or the amount of dividends and the interest did not entitle the note holders to a share in the company's annual profits.

Tax Evasion Provision not Applicable to Consecutive Mergers

In a decision issued on 5 July 2013 (KHO:2013:126), the Supreme Administrative Court deemed that a series of consecutive mergers did not constitute tax evasion as referred to in section 52 h of the Act on the Taxation of Business Profits and Income from Professional Activity.

In the case, on 30 April 2007 Company B merged with Company A, which had owned Company B's entire share capital since 1996. Company B merged with Company C on 27 April 2007. Company B had owned the entire share capital of Company C since 1995. Company C, in turn, had owned 40% of the shares in Company A.

The justifications for the arrangement were streamlining the group structure, administrative savings and the transfer and securing of subordinated loans granted to Company C primarily by the shareholders of Company A. The mergers made it possible to dismantle cross-holdings, which made the financial valuation of the company easier and, thus, improved the company's ability to obtain financing and carry out a planned change of generation. In addition, Company C's confirmed losses, which were transferred, had been accrued from business operations engaged in while owning Company A.

The Supreme Administrative Court deemed that there were non-tax-related reasons for the arrangement, and it was not evident that the only or primary reason for the arrangements would have been tax evasion or avoidance. From the perspective of M&A provisions, the transfer of losses accrued by Company C during the 1998–2001 tax years to Company A in the arrangement was not deemed a foreign tax benefit. This being the case, the Supreme Administrative Court deemed that section 51 h was not applicable to the arrangement.

The Share Redemption Price Was Deemed to be Monetary Consideration When the Redemption Was Not Carried Out Pursuant to the Limited Liability Companies Act

The decision of 12 June 2013 of the Central Tax Board (KVL:033/2013) dealt with whether the share redemption price paid to shareholders who had opposed a demerger was to be deemed monetary consideration in the sense that if such consideration exceeds 10% of the demerger consideration, the arrangement cannot be deemed a tax neutral demerger under the Act on the Taxation of Business Income.

In the case, Company A had carried out a demerger into Company B and Company C in such a way that the shareholders of Company A were given consideration in the form of B Company and C Company shares. The demerger consideration would potentially be redeemed in redemption proceedings pursuant to Chapter 17(13) of the Limited Liability Companies Act. There was also the possibility that Company C might purchase the shares of Company A shareholders who opposed the demerger before the general meeting that was to decide on the demerger.

The Central Tax Board deemed that the redemption price paid in redemption proceedings under the Limited Liability Companies Act to shareholders who had opposed a demerger was not monetary consideration as referred to in the Act on the Taxation of Business Income.

However, in the event Company C bought the shares of those Company A shareholders who were opposed to a demerger before the general meeting that was to decide on the demerger, this would not be deemed a statutory obligation to redeem shares. Consideration paid in this way to shareholders in connection with a demerger was to be deemed monetary consideration of the kind referred to in the Act on the Taxation of Business Income.

The decision has become final.

Determining the Date of Assignments For the Purpose of Calculating Capital Gains

On 29 May 2013, the Central Tax Board gave a decision (KVL:031/2013, vote 6-2) on what date should be deemed the date of assignment when calculating capital gains.

A and Company X signed a sales agreement for the sale of the shares of Company Y. According to the terms of the sales agreement, title to the shares would pass to Company A at the time of the final conclusion of the agreement, which took place in January 2013. The sale was conditional on the securities exchange of the buyer's home country and the general meeting of Company X approving the sale within 90 days of the signing of the sales agreement. These conditions were derived from the rules of the above securities exchange. According to the terms of the sales agreement, the buyer would have no obligations toward the seller in the event the sale was not carried out for the reasons stated above. The exchange approved the sale on 6 December 2012, and the general meeting of Company X gave its approval on 26 December 2012.

The Central Tax Board deemed that the assignment of shares took place on 26 December 2012 on the basis that a mutually binding agreement between A and Company X to assign the shares had come about after the exchange and the general meeting of Company X approved the sale. The fact that the agreement was finally concluded in January 2013 was not relevant when setting the date of assignation for the purpose of calculating capital gains.

The decision has not become final.