Tax and Legal News, November 2021

Corporate taxation

The government proposal for amending the interest deduction limitation rules includes only technical specifications in comparison to the draft

The government has issued proposal HE 211/2021 on 4 November 2021, amending the interest deduction limitation rules. The given proposal includes only technical specifications in comparison to the previously issued draft.

Although there are a number of details, the main purpose of the amendment is that in applying the balance sheet exemption (equity / assets test), debt on the consolidated balance sheet may be treated as equity if the debt is from a party (or its affiliate) with at least 10% direct or indirect ownership in the taxpayer (or its affiliate).

The loss of a controlled foreign company incurred during previous ownership was deductible

In 2010 the entire share capital of a foreign company was sold from a domestic limited liability company and its shareholder to another domestic company. The foreign company had been treated as a controlled foreign company (CFC) in the sellers’ taxation and it had incurred a loss in 2008.

The Supreme Administrative Court ruled that the loss incurred by the CFC could be deducted from the buyer’s CFC income despite the change of ownership.

The expiry of debt arising from distributions of equity was treated as taxable business income

The company had unpaid dividends and capital payments that could not be paid to some of the shareholders. Once the debt expired, the company booked it as an increase in equity. The company had declared the amounts as taxable business income, but later filed a claim for adjustment, claiming the items as tax-exempt income.

The Supreme Administrative Court of Finland ruled that the expiry of the debts should be treated as taxable business income for the company.

Government proposal on rules for reverse hybrids released

The government proposal concerns the implementation of ATAD2 rules on so-called reverse hybrids. From a Finnish perspective, a reverse hybrid could generally be a Finnish general or limited partnership. According to domestic rules, the partnerships are not subject to tax, but the income is allocated to the partners and taxed as their income. The jurisdiction of the partner may, however, consider the partnership as a non-transparent entity (separately subject to tax), in which it may not tax the income of the partners due to this classification. The purpose of the rules is to catch such circumstances. Finland has chosen to implement the rules so that in such cases the partners (rather than the partnership, as in the directive) would be subject to tax in Finland.

The proposal is presently in the parliamentary committee process. The regulation is set to enter into force on 1 January 2022.

Members of G20 countries welcomed historical Global Tax Agreement

The members of the G20 countries welcomed the historic OECD global tax deal after meeting in Rome. The historical agreement will consist of two pillars: reallocation of profit of multinational enterprises operating in the digital business and global minimum tax base. According to the estimation the new rules will come into effect in 2023.