Finland looks to limit the deductibility of interest

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Finland looks to limit the deductibility of interest

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The Finnish government has released a draft bill to limit the deductibility of interest expenses in corporate taxation. The goal of the proposed regulation is to secure Finland's tax base and to balance competition between domestic and foreign groups of companies

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Janne Juusela

Interest expenses are widely deductible in business taxation and only applying the transfer pricing regulation or the general provision for tax avoidance can restrict deductibility. Applying the new proposed limitation will not require any intention of tax avoidance or deviation from the arm's-length principle, but it will be applicable as a general rule. According to the draft, limitations would be applicable to corporations, partnerships, corresponding foreign entities and their permanent establishments in Finland. The limitations would be applied only if the interest expenses exceed the interest income received by the company, as in if the company has net interest expenses.

Interest paid to a related party would become non-deductible if the net interest expenses exceed 30% of the company's EBITDA. In the proposed regulation, group contributions would be included in EBITDA.

The related parties are defined similarly as in the Finnish transfer pricing regulation. This means that parties are deemed to be related, if the other party has directly or indirectly control over the other.

Also interest paid to a third party could be regarded as a related party interest in situations such as back-to-back arrangements or when a related party has secured a third party loan with a collateral. Applying limitations in these indirect situations would require a connection between the interest paid to the third party by the debtor and the collateral given to the third party by the related party.

According to the draft, a general safe haven of always deductible €500,000 ($650,000) would apply. This amount would include all interest expenses, whether paid to related parties or not.

The proposed regulation would allow an indefinite carry forward of non-deductible interest expenses. The use of the interest carried forward would require unused EBITDA in the fiscal year of use. Change of ownership would not affect the possibility to carry non-deductible interest expenses forward.

Janne Juusela (janne.juusela@borenius.com)

Borenius – Taxand

Tel: +358 9 615 333

Website: www.borenius.com

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