Waselius & Wist

As a consequence of the economic downtrend, financiers have more often been forced to take over a debtor company in order to secure their interests under a facility agreement. The tax treatment of any potential credit losses following such takeovers has raised some concerns, as the Finnish Business Income Tax Act includes a general provision according to which credit losses relating to loans/facilities given to a company where the lender owns more than 10% of shares are not tax-deductible.

The Supreme Administrative Court has, however, very recently rendered a decision (KHO 10.1.2012/6), according to which credit losses that relate to loans/facilities given to a company prior to the financer (a bank) acquiring 10% (or more) of the equity/shares in the debtor company remain tax-deductible. The Court reasoned that such loans/facilities do not differ from financing given by the bank to companies where the bank has no ownership and a forced takeover scenario should generally not lead to the bank ending up in a worse off position from a tax point of view. Accordingly, it is expected that this decision will facilitate future enforcement of security interests.

For further information, please contact Mr. Niklas Thibblin.

As of 1 January 2012, the corporate income tax rate in Finland was reduced from 26% to 24.5%. This is a welcome change, a permanent saving for companies of all sizes.

At the same time, the tax rate for capital income (including capital gains) was increased from 28% to 30%. In addition, for capital income exceeding 50,000 EUR, the applicable tax rate is 32%.

Further, the maximum amount of dividends that can be distributed tax-exempt to a private individual from a non-listed company was reduced from 90,000 EUR to 60,000 EUR.

For further information, please contact Mr. Niklas Thibblin.

Following the approval in May this year by the European Commission, the Finnish Council of State has today, at long last, enacted the final version of the Finnish Real Estate Investment Trust (REIT) scheme.

However, despite intensive lobbying efforts by commercial real estate investors, the Finnish REIT scheme remains limited to residential housing only. The introduction of REITs in Finland is accordingly intended to encourage investment in affordable rental accommodation.

Under the Finnish REIT scheme, to benefit from corporate tax exemption, REITs (i.e. Finnish limited liability companies) must be listed on a public stock exchange or an MTF within the EEA with no single shareholder owning, directly or indirectly, more than 9.99% of the share capital. At least 80% of the value of the assets of a REIT must also consist of real estates that are used primarily for residential purposes and the activities of the REIT must be limited to the letting of properties (or activities closely related thereto). The capital structure of a REIT must furthermore be such that its potential debt financing does not exceed 80% of its balance sheet total. Moreover, the REIT must distribute at least 90% of its annual profits to shareholders as dividends.

Any profits made by the REITS will be subject to tax at shareholders’ level. Dividend withholding tax issues may thus still arise for non-resident investors (in particular certain types of investment funds).

For further information, please contact Mr. Niklas Thibblin.

The Supreme Administrative Court has upheld the Market Court’s decision to approve the acquisition by Fortum Power and Heat Oy of E.ON Finland Oyj in 2006. The Market Court found that the acquisition did not lead to the creation or strengthening of a dominant market position despite Fortum’s strong position on the electricity generation and wholesale market, since the relevant geographic market includes at least Finland and Sweden. Contrary to the Market Court’s view, the FCA had argued that the geographic market is at times only national due to cross-border transmission capacity constraints. Notably, Fortum had a right to appeal the FCA’s decision, although Fortum had previously approved the conditions on the acquisition imposed by the FCA.

For further information, please contact Ms. Lotta Pohjanpalo or Mr. Mikko Eerola.

The Government Bill on a new Competition Act was brought before the Finnish Parliament on 11 June 2010. The proposal includes significant changes to the provisions of the current Competition Act in relation to merger control, sanctions and leniency, actions for damages and certain procedural rules. For an overview of the proposed changes, please refer to our competition newsletter of 5 May 2009 at www.ww.fi/news. The new Competition Act is expected to enter into force as soon as possible.

For further information, please contact Ms. Lotta Pohjanpalo or Mr. Mikko Eerola.

The Finnish Competition Authority (“the FCA”) has proposed to the Market Court that a competition infringement fine of €4 million be imposed on the Finnish homeware company Iittala Group Oy Ab for prohibited resale price maintenance.

According to the FCA, Iittala fixed the minimum resale prices for a majority of its most well-known products, including e.g. the Aalto glassware and the Marimekko and Moomin collections, thereby preventing retailers from competing on price by lowering their own margins. Iittala also fixed maximum discount percentages and refused the delivery of products or denied discounts to retailers not following these rules, claims the FCA. According to the FCA, the resale price maintenance covered Iittala’s all major retailers in Finland and lasted for almost three years (2005-2007), notably also after the FCA had commenced its investigation of the matter in 2006.

The FCA did not find it necessary to propose competition infringement fines for the retailers, although some of them were found to have agreed to the prohibited price-fixing, as the price-fixing was based on Iittala’s strategies and agreed upon by the retailers at least partly due to the pressure exerted by Iittala to adhere to this strategy.

For further information, please contact Ms. Lotta Pohjanpalo or Mr. Mikko Eerola.

The Finnish Financial Supervisory Authority’s (FFSA) recommendation on remuneration principles in the financial sector is mainly based on the European Commission’s recommendation on remuneration policies in the financial services sector of 30 April 2009. It intends to ensure, inter alia, that remuneration mechanisms within entities supervised by the FFSA do not include features that increase risk taking or diminish the stability of such entities or even the whole financial markets.

It is suggested that financial institutions establish and maintain remuneration policies that cover the whole personnel of the financial institution in question. The recommendation should, nevertheless, be applied in particular when remunerating the Managing Director and such other persons whose actions have a material impact on the risk exposure of the financial institution. Remuneration policies should be consistent with sound and effective risk management and should not induce excessive risk taking. Further, they should be in line with the business strategy, objectives, values and long term interests of the financial institution, and be consistent with the principles relating to the protection of clients and investors.

The recommendation includes guidelines as to striking an appropriate balance between the fixed and variable elements of pay. Further, it is recommended, inter alia, that the payment of the major part of any substantial bonuses or other variable components of remuneration should be deferred by at least three years and that the financial institution should have the ability to withdraw bonuses that are paid after the realization of a relevant risk factor. As to performance measurement, performance related remuneration should be based on an overall assessment reflecting individual performance as well as the performance of both the relevant business unit and the entire financial institution with due consideration of all the risks. Also, performance should be assessed against a multi-year framework and the payment of bonuses should recognize the relevant business cycle of the financial institution. It is further recommended, inter alia, that significant financial institutions would set up their own remuneration committees, independent control over the effectiveness and implementation of remuneration policies would be established and that relevant details of remuneration policies would be disclosed in a transparent manner.

For further information, please contact Ms. Tarja Wist or Mr. Lauri Peltola.

The Ministry of Justice in Finland has recently completed its proposal for implementation in Finland of the European Directive (2009/44/EC) amending Directives 98/26/EC and 2002/47/EC on settlement finality in payment and securities settlement systems and financial collateral arrangements, respectively. The Directive is intended to be implemented through amendments to, inter alia, the Finnish Act on Certain Terms Relating to Securities and Currency Trade and Clearing Systems (the “Netting Act”) and the Act on Financial Collateral (the “Financial Collateral Act”).

Due to increased cross-border activity amongst settlement systems and the need for further certainty in respect of the night-time settlement of securities transactions, a number of more or less technical amendments in line with the European initiative are being proposed to the Netting Act. In practice, these amendments include the broadening of the definition of settlement systems in the Netting Act, which, going forward will encompass besides entities operating such settlement systems and the participants thereto, also other equivalent parties. Moreover, under the current Netting Act, obligations that have been entered into the settlement system on same day as the insolvency proceedings of a participant are commenced can be netted during the same day, provided that the entity operating the settlement system was not aware or should not have been aware of the commencement of insolvency proceedings at the time the obligations were netted. Such same day netting under the Netting Act is now proposed to be extended also to the night-time settlement of obligations.

As regards financial collateral arrangements, the proposed amendments to the Financial Collateral Act intend to extend the protection of the Act to cover also the use of new types of collateral in the relevant marketplaces, such as loan receivables and credit claims. It is intended that, for the purposes of the Financial Collateral Act, such new types of collateral would cover loans granted mainly by credit institutions, electronic money institutions and entities provided for in Article 4 of the European Directive on the taking up and pursuit of the business of credit institutions (2006/48/EC) (i.e. in Finland, Teollisen yhteistyön rahasto Oy and the Finnish Export Credit Agency, Finnvera Oyj).

The proposed legislation in respect of financial collateral arrangements is intended to enter into force on 30 December 2010, whereas amendments to the Netting Act shall enter into force some three months later.

The Supreme Administrative Court has recently in its decision (KHO:2010:15) upheld the preliminary ruling of the European Court of Justice C-303/07 (Aberdeen Property Finninvest Alpha Oy), in which the ECJ considered that Finnish withholding taxes levied on dividends paid by a Finnish limited liability company to its Luxembourg SICAV parent company constituted a restriction of freedom of establishment and that such withholding taxes thus should be abolished in circumstances where similar dividends paid to a Finnish parent company were exempt from taxation. Indeed, Finland has already as of 1 January 2009 changed its tax legislation to such effect that no withholding tax is levied in Finland in circumstances where the dividends would have been exempt from taxation if the EU/EEA recipient were resident in Finland and the recipient would not be able to fully off-set the applicable withholding tax in its state of residence.

In a subsequent case, the Supreme Administrative Court rendered a decision (KHO 12.3.2010/470), according to which profit distributions paid out of a Luxembourgian SICAV shall in turn qualify as dividend for Finnish tax purposes, although there, as such, is no type of company under Finnish company law with a legal form similar to a Luxembourg SICAV. In previous taxation practice, profit distributions from a Luxembourg SICAV have been taxed as profit shares from investment funds.

Based on the decisions, Luxembourg SICAVs may obviously be used as tax efficient tools for structuring a large number of both Finnish inbound and outbound investments. Especially the fact that many Finnish corporate investors (Finnish limited liability companies) can often receive dividends tax exempt provides for interesting tax planning opportunities. Further, to the extent that Finnish or foreign investors have suffered tax losses as a consequence of the previous taxation practice, they should consider filing claims for rectification.

For further information, please contact Mr. Niklas Thibblin.

The Supreme Administrative Court has recently rendered a decision (KHO:2010:12), according to which a holding company set up mainly by private equity investors may still be deemed as a company engaged in private equity activities. In an earlier decision from 2009 (KHO:2009:64), the Supreme Administrative Court took the opposite view, thus removing the private equity status of a holding company and rendering the losses arising from the liquidation of its subsidiary non-deductible for tax purposes.

Contrary to the earlier case – where the holding company had no employees and carried no active business activities and where the intention was to liquidate the target (subsidiary) company immediately after the transaction – the holding company employed in this particular case four employees providing group internal and private equity services, but apparently most importantly, had also held its underlying subsidiaries for a longer period of time. In these circumstances, the Supreme Administrative Court considered the holding company eligible for the private equity status, which accordingly made the goodwill included in the purchase price of its Finnish subsidiaries deductible for tax purposes upon the liquidation of the subsidiaries in question.

The ruling of the Supreme Administrative Court clarifies to some extent the private equity concept. Private equity structures should now be carefully scrutinized to determine their tax efficiency.

For further information, please contact Mr. Niklas Thibblin.