The Finnish Supreme Administrative Court (“SAC”) issued last week two new precedents on the determination of the transfer tax base in real estate company acquisitions. The rulings clarify the circumstances (i) in which a transfer tax liability may arise when the buyer, in connection with the acquisition, finances the repayment of the target company’s debts and (ii) where the debt of the target company may, in reality, be included in the share price or value for transfer tax purposes.
According to current rules, in addition to the purchase price, the transfer tax base also includes any debt or liabilities of the acquired entity (towards the seller or a third party) assumed by the purchaser based on the SPA, provided that the assumption of such debt or liabilities accrues to the benefit of the seller. Further, there are specific rules with respect to companies in the real estate sector, since the transfer tax base shall always include certain loans that based on law, corporate resolutions or the Articles of Association can be held directly allocable and connected to the shares in such companies. The meaning and applicability of the latter provisions to real estate companies (“REC”) and mutual real estate companies (“MREC”) has, however, not been entirely clear.
The first ruling concerned the question when a loan taken by an MREC can, in fact, be deemed as the shareholder’s allocable proportion of the MREC’s debt and, as such, allocable and connected to the shares concerned. In this particular case, the target MREC had received an acquisition loan from an external bank to acquire, construct and develop a property. As in any typical MREC-structure, the shareholder was under the AoA of the MREC required to pay the MREC a fee for the maintenance and management of the property (including a so-called finance fee to cover the MREC’s financing expenses and loan installments). The AoA also stipulated that the shareholder had a right to “repay” its proportional share of the loan to the MREC. Although neither the board nor the shareholder had formally taken any decisions on the allocation of the loan to the shares (and indirectly to the shareholding), the SAC still concluded that the bank loan should be included in the transfer tax base. Based on the foregoing, any loan taken by an MREC for the purpose of acquiring, constructing, remodeling or renovating property will, as a rule, be deemed as a debt allocable and connected to the shares, thus increasing the transfer tax base.
The second ruling concerned the acquisition of a REC, which at the time of acquisition had a loan from an external bank. In the SPA, the buyer had undertaken to procure that the loan is repaid by the REC at closing. For this purpose, the buyer made an investment in the REC’s reserve for invested unrestricted equity. According to the SAC, in circumstances where the REC was solvent and could have met its repayment obligations under the loan terms through its rental income, this arrangement could not be such an assumption of liability that accrued to the benefit of the seller. This being the case, the fact whether the seller had provided a guarantee for the loan made no difference or relevance. Finally, the SAC viewed that the bank loan could equally not be deemed allocable or connected to the shares in the REC, since neither the AoA nor any corporate resolutions or other agreement provided that any maintenance or financing fee was to be paid by the shareholder to the REC.
The SAC rulings introduce guidelines on how share deals especially in REC or other real estate related holding company transactions can be structured. In addition, the latter ruling may open up possibilities for reclaiming transfer tax from past transactions, based simply on a previous incorrect tax assessment. Our tax team is happy to provide further assistance – please bear, however, in mind that refunds concerning the year 2014 must be applied for by 31 December 2019.
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