The Finnish Ministry of Finance has recently prepared a draft bill, which, if enacted, will introduce entirely new interest deduction limitation rules in Finland. To date, Finland has not effectively had any specific limitation rules on interest deductibility and, for example, anti-avoidance rules have generally not been used by the tax authorities in an attempt to deny or restrict deductions of (arm’s length) interest expenses.
The primary purpose of the bill is to limit the deductibility of interest payments between related parties both in domestic and cross-border scenarios. In addition, the restrictions would also apply to interest expenses on loans granted by third party lenders in certain back-to-back lending scenarios and/or in circumstances where an affiliated company has granted a guarantee or security for the loan.
The actual restrictions on interest deductibility would be based on an EBITDA-To-Interest-Ratio. According to the bill, interest expenses exceeding the amount of accrued interest income (i.e. net interest expenses), would only be deductible up to an amount that corresponds to 30 % of EBITDA. Net interest expenses exceeding 30 % of EBITDA (i.e. non-deductible interest expenses) could, however, be carried forward indefinitely.
Under a specific safe haven provision, the restrictions on interest deductibility would, nonetheless, only kick in with respect to net interest expenses exceeding € 500,000 per tax year.
The proposed restrictions on interest deductibility are planned to come into force on 1 January 2013 and they will obviously have an impact on, inter alia, private equity structures and other financing structures that have taken advantage of debt push down. We will keep you updated on any further developments.