Tax and Legal News, September 2021

Corporate taxation

Income of a controlled foreign company (CFC) was realized only at the end of the CFC’s financial year

The Supreme Administrative Court decided in its case KHO 2021:115, that CFC income is deemed realized at the time when the  financial year of the CFC ends. In the case, the CFC had disposed of shares resulting in profit, after which (and prior to the end of the financial year of the CFC) the Finnish shareholder had become resident in Malta. 

The Finnish Supreme Administrative Court (SAC) issued rulings regarding the application of interest deductibility rules. 

In recent decisions of the SAC (KHO 2021:123 & KHO 2021:124) the Court decided especially the following:

  • Payments made based on an interest derivative contract (including premium payments and payments due to negative benchmark interest) can be considered as interest within the meaning of the interest deductibility rules. 
  • A joint venture -contract based on 50/50-ownership and with no stipulations providing ultimate control to either party was sufficient to break off the group relationship relevant for assessing whether loans are provided by related parties or not.
  • A consolidated balance sheet prepared by a Finnish limited partnership PE fund, which did not fulfil the requirements of consolidated financial statements as stipulated in the Accounting Act, was not accepted as the basis for comparison for purposes of the equity / assets test, which if applicable provides a safe harbour from the interest deductibility restrictions.
China STA’s Public Notice on the application of simplified procedure for unilateral APAs effective in September

n April, we wrote about a consultation draft of the State Tax Administration (STA) of China that proposed a simplified procedure for unilateral Advance Pricing Agreements (APAs). On July, STA published the Public Notice [2021] No.24 (Public Notice) on matters regarding the application of simplified procedures of unilateral APAs, effective September 1, 2021. 

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Amendments to the transfer pricing adjustment provision

A draft government proposal on amendments to the Finnish transfer pricing adjustment provision has been published. The purpose of the amendments is to harmonize the scope of Finnish transfer pricing adjustment provision with OECD’s model tax convention and OECD’s transfer pricing guidelines. As proposed in the draft government proposal, the identification of actual transactions between associated parties could be made to the full extent provided by OECD’s transfer pricing guidelines.  The proposed amendments would also allow the Finnish tax authorities, under exceptional circumstances, to disregard the transaction and substitute it with another transaction, as permissible also by OECD’s guidelines.

New initiative debt-equity bias reduction allowance (DEBRA)

The European Commission’s new initiative Debt-Equity Bias Reduction Allowance (DEBRA) has proceeded to the feedback period. Debt financing is usually favored when financing companies as interest payments are tax-deductible for the payer. The incentives to debt financing may result in over-indebtedness which increases the risk of bankruptcies and threatens the stability of the financial system.

The initiative’s aim is to tackle this tax induced debt-equity bias and set both financing methods on equal footing across the EU, thus encouraging companies to finance investments with equity instead of debt financing. The initiative could be achieved either disallowing the deductibility of interest payments or enabling the tax deductibility of notional interest for equity. The feedback period ends on October 7th 2021 and the Commission adoption of a potential Directive is scheduled for the first quarter of 2022.

New initiative to reduce the use of shell companies within EU

The European Commission has adopted a new initiative (Fighting the use of shell entities and arrangements for tax purposes) that aims to curb aggressive tax planning in the EU through shell companies. The proposal includes several policy options that will be analysed. The baseline scenario will consider current national practices and legislation, but other measures such as new legislative initiatives to define new tax related substance requirements and new mechanisms will be considered as well. The initiative is estimated to have two main economic impacts: to improve tax fairness and increase overall tax revenues within the EU. The feedback period of the initiative ended on August 28th and the Commission adoption of a possible Directive is scheduled for the first quarter of 2022.

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