The deductibility of interest costs on intra-group loans has been limited since 2014. Very broadly, the deductibility of net interest expenses is limited to a defined percentage of taxable EBITDA. Nonetheless, according to a specific safe harbor rule, the restrictions on interest deductibility are not applied if the borrower company’s equity ratio (equity vs total balance) is equal to or higher than the same ratio calculated on the basis of a consolidated group balance sheet of the ultimate parent (the “balance sheet test”).
In a recent (not yet binding) ruling by the Central Tax Board, the Central Tax Board took the view that the balance sheet prepared at the level of a Finnish holding company should be deemed as a non-qualifying sub-group balance sheet. Accordingly, as the comparison must be based on a consolidated balance sheet prepared at the level of the ultimate parent, the sub-group balance sheet could not be used for purposes of the balance sheet test exemption.
In the case at hand, the ultimate parent was a Guernsey fund (partnership), which was not regarded as a separate legal entity, neither was it required to prepare a consolidated balance sheet under Guernsey law. The ruling of the Central Tax Board, which apparently indicates that the comparison should be made at the Guernsey level, could obviously lead to a situation where no qualifying consolidated balance sheet for balance sheet test purposes is available. Such fund structures could thus be denied the possibility to take advantage of the balance sheet test exemption. The ruling of the Central Tax Board has been appealed to the Supreme Administrative Court, which is expected to render its decision in early 2018.