The Supreme Administrative Court (SAC) has on 19 May 2016 issued two significant year book rulings regarding the deductibility of interest expenses allocated to a Finnish branch of a foreign company. In both rulings the SAC denied the branch’s right to deduct the interest expenses in a debt funded acquisition structure, where the shares in a Finnish group company were acquired in the name of a foreign company’s branch registered in Finland.
In the case a foreign parent company sold the shares in its Finnish subsidiary to a Finnish branch of its foreign subsidiary. Correspondingly the debt resulting from the acquisition of the shares was allocated to the branch acquiring the shares.
The SAC ruled, that the Finnish branch did not have sufficient personnel and functions related to the ownership of the shares to be regarded as using the owner’s authority in the Finnish subsidiary. Hence, in SAC’s view the acquired shares were not regarded as assets belonging to the branch, and the debt resulting from acquiring the shares could not be allocated to the branch. As a result the interest expenses were also non-deductible for the branch.
The SAC did not take a stand on the tax avoidance nature of the arrangement, instead the case was solved based on the technical allocation of the ownership of the shares. The ruling was decided by vote (3-2) and the two minority members of the Court would have retained the ruling of the Administrative Court as such, and regarded the arrangement also as tax avoidance.
In the case the SAC regarded that a multiphase arrangement, where the shares were transferred from the group’s parent company to another group company’s Finnish branch via multiple companies, was artificial. The SAC was of the view that the arrangement was motivated solely by tax reasons, and the aim was to avoid paying tax by benefitting from the group contribution system and interest deductions.
The case was, however, decided by vote (2+1-2) and two dissenting members of the Court would have accepted the company’s appeal and would have accepted the deductibility of the interest expenses. In their dissenting opinion it is stated in this respect i.a. that using holding company structures in corporate acquisitions is in line with established case law, and the form used in the case should not be rejected solely because a holding company structure was used. Further, it is stated that post-closing structuring relating closely to the acquisition should be regarded as usual and having valid commercial reasons for example in a situation where the shares are originally acquired by the parent company and are then transferred to another company within the group.
Based on the dissenting opinion it seems, that there is a view within the SAC that would allow using holding company structures and transferring the acquired companies to a reasoned location within the group structure also going forward.
In the dissenting opinion it is also stated that dismissing an artificial arrangement by virtue of § 28 of the Act on Assessment Procedure (AAP) would require that the arrangement would result in a tax benefit in Finnish taxation that would not have been received had the correct form been used. According to the opinion, any tax benefit possibly achieved outside Finland by using the branch structure would not entitle the application of Finnish tax avoidance legislation.
Hence, according to the view adopted in the dissenting opinion, receiving a tax benefit outside Finland by utilizing a branch structure should not provide sufficient grounds to apply the tax avoidance legislation in Finland. However, from the perspective of the majority this view did not have an effect on solving the case, even though it seems rather justified from the perspective of the preconditions for applying the § 28 of the AAP.
Effects to group restructurings and acquisitions
In both cases the SAC confirmed the imposed tax increase amounting to ca. 5 % of the added income to the branch. The preconditions for imposing the tax increase were not even affected by the fact that the first case regarded the allocation of the shares between the head office and the branch and the application of § 18 of the Business Income Tax Act, whereas the tax avoidance rule of § 28 of the AAP was not applied.
The rulings should be taken into account when planning corporate restructurings and structuring acquisitions. For example the effect of the rulings on using holding company structures in acquisitions remains to be evaluated, even when holding company structures have previously been accepted in established case law. In further structuring considerations, it should in any case be ensured that the structure is commercially justified also for tax purposes. The Tax Administration has declared, that it will issue further guidance on the effect of the rulings on the Tax Administrations guidance and interpretations by 27 May 2016.
For further information:
Timo Torkkel tel. 020 760 3370
Antti Leppänen tel. 020 760 3247
Tero Lehmusvaara tel. 020 760 3082