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Finland: Proposed changes to interest deduction limitation rules

Finland: Interest deduction limitation rules

The Finnish Ministry of Finance in January 2018 released a draft of a proposal for new interest deduction limitation rules based on the Anti-Tax Avoidance Directive (2016/1164/EU). The proposed amendments would expand the scope of the current rules significantly, and if enacted, would be effective beginning in 2019.

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Overview of changes to interest deduction limitation rules

A considerable part of the proposed changes to the interest deduction limitation rules is based on certain minimum requirements under the Anti-Tax Avoidance Directive. The proposal would aim to implement the directive’s measures as part of the Finnish national legislation, as follows:

  • The interest deduction limitation rules would apply to interest paid to both related parties and third parties.
  • The rules would apply to all Finnish resident corporate taxpayers—and not only with respect to entities conducting business activities (as under current law). 
  • The definition of interest would be expanded, among other things, to apply to loan arrangement fees and financial leases.
  • The definition of related parties would be revised or tightened so that it would apply to a 25% direct or indirect ownership or profit share (as opposed to the current 50% requirement).

Other amendments

The Anti-Tax Avoidance Directive provides several possible exceptions to the scope of interest deduction limitation rules. However, most of these exceptions are not included in the draft proposal. Some of the proposed rules in the Finnish draft are as follows:

  • An exemption from the interest deduction limitation rules based on a balance sheet test would be repealed.
  • Financial institutions and insurance undertakings as well as long-term public infrastructure projects would no longer be outside of the scope of the limitation rules.
  • The limitation rules would not apply to stand-alone entities.
  • The deductibility of net interest expenses would still be limited to 25% of EBIDT (earnings before interest, depreciation, and taxes) or taxable business profit added with interest expenses, tax depreciations, and net group contributions.
  • The general threshold of €500,000 would continue to apply, and a new threshold of €3 million would be introduced for interest expenses on third-party debt.
  • The current carryforward rules would still apply, but no carryback rules as included in the directive are proposed in the Finnish draft.

KPMG observation

Tax professionals have observed that the proposed amendments would have significant implications for the interest deduction limitation rules in Finland. The scope of application of the rules would be substantially expanded—and in particular, the proposed changes would affect certain entities that currently are not subject to the interest deduction limitation rules (for example, real estate companies and companies that have been able to apply the balance sheet test exemption). Companies therefore need to consider evaluating their existing capital structure and whether recapitalization might be warranted.

 

For more information, contact a tax professional with the KPMG member firm in Finland: 

Hanna Höglund | +358 20 760 3278 | hanna.hoglund@kpmg.fi

Antti Leppänen | +358 20 760 3247 | antti.leppanen@kpmg.fi

Jussi Järvinen | +358 20 760 3077 | jussi.jarvinen@kpmg.fi

Jyrki Holla | +358 20 760 3242 | jyrki.holla@kpmg.fi

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