The Finnish Supreme Administrative Court (SAC) rendered on 19 May 2016 two landmark rulings on the deductibility of interest expenses in so-called “debt push-down structures”. On the same day, the applications for leave of appeal in three similar cases were rejected by the SAC, where the arrangements had been viewed as tax avoidance by administrative courts.
In all cases, debt had been allocated to a permanent establishment (branch) in Finland of a foreign corporate entity. According to the rulings by the SAC, the deductibility of interest expenses can be denied in circumstances where the acquisition debt cannot be allocated to the branch or where the arrangements can be considered artificial aimed at not having to pay tax. Although the reasoning of the SAC is not entirely clear, it appears that the SAC generally views that a branch does not normally perform the necessary significant people functions in order to enable the allocation of a shareholding to the branch. The use of branches for debt push-down structures will therefore become significantly more difficult.
Following the rulings, the Finnish Tax Administration published on 27 May 2016 a guidance, according to which the rulings could also have an impact on the debt push-down arrangements carried out through a Finnish holding company. Such structures could generally be challenged as being abusive under the general anti-avoidance rules. As the Finnish (and international) norm has been to allow interest expenses to be deducted for tax purposes, we now find ourselves in a landscape where this norm has come under a potential attack.
Based on the above, it will be increasingly important to demonstrate valid business reasons for the chosen structure and that the structure corresponds to its economic goals. Preferably, the holding company should also have sufficient substance (for example personnel) and reasonable functions. As the current legal position nevertheless is uncertain, investors should consider applying for an advance tax ruling prior to setting up a new acquisition structure.
In order to analyse the impact of the rulings on any existing debt push-down structures, please contact