Legal Updates
Legal updates covering current topics.
2019 Investors Welcome Changes in Transfer Tax Practice
The Finnish Supreme Administrative Court (“SAC”) has recently issued a decision that essentially changes the calculation of the transfer tax base in M&A deals (share acquisitions).
Although, foreign investors may at present in certain circumstances take advantage from a transfer tax exemption, the main rule still is that share acquisitions (with the exception of publicly traded shares) are subject to transfer tax (at a rate of 1.6% or 2%). 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. Based on established taxation practice, for example, the transfer and sale of a shareholder loan to the purchaser in connection with the acquisition has been deemed as such an assumption of debt for the benefit of the seller, which will trigger a transfer tax liability. Equally, any repayment made by the acquired entity of a shareholder loan in connection with the transaction has been deemed as an amount that should be included in the transfer tax base, especially when this repayment has been financed by the purchaser and/or is a condition under the SPA.
Now, the SAC has, however, taken a different view and considered that the purchase of a shareholder loan in connection with a share deal should not be included in the transfer tax base, when the purchaser, under these circumstances, has neither financed the acquired entity for the purpose of enabling the repayment of the shareholder loan nor has the purchaser given any other guarantees in the SPA with respect to the repayment of the loan. Further, according to the SAC, a shareholder loan can neither be viewed as a security or other financial instrument within the meaning of the Finnish Transfer Tax Act. Instead, the purchase of a shareholder loan shall be considered as a mere change of creditor, which falls outside the scope of transfer tax.
The ruling of the SAC introduces alternatives for how a share deal could be structured and financed, at least from a transfer tax point of view. In addition, the ruling could open up possibilities for reclaiming transfer tax from past transactions, based simply on a previous incorrect tax assessment. However, prior to making any reclaim applications it is important to assess the provisions in the SPA and other relevant documentation to ensure that the appropriate conditions for a transfer tax refund are met. Also, the acquisition of shares (and shareholder loans) in real estate companies may require a more in-depth analysis, since certain loans, either based on law or the Articles of Association, can be held directly allocable to the shares in such companies and thus always included in the transfer tax base.
Waselius & Wist’s tax team can, in addition to advising on deal structuring, undertake an initial feasibility study on past transactions and assist you throughout a potential reclaim process.
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Several amendments to the Competition Act
Several amendments to the Competition Act have been adopted.
The amendments include changes to the inspection rights of the Finnish Competition and Consumer Authority (the “FCCA”). The FCCA now has the right to conduct searches in temporary copies of data made during inspections also in its own premises while previously the inspection had to be completed as a site inspection. In addition, the FCCA now has the express right to inspect data regardless of the medium in which the data is saved.
Time limits for merger control proceedings have been amended as well and are now counted as working days instead of months. The FCCA’s processing time for phase I is 23 working days (instead of one month), and the processing time for phase II is 69 working days (instead of three months).
The amendments also include a change to the competition neutrality provisions. Municipalities, joint municipal authorities, the state or any entities under their control that engage in economic activities in a competitive situation must maintain separate accounts on the activities from 1 January 2020.
Moreover, the amendments enhance the exchange of information between various authorities. Notwithstanding secrecy provisions, the FCCA may deliver information to certain other authorities if the other authorities need the information to fulfil their statutory obligations. The list of authorities, to which the FCCA may deliver information, has been expanded and now includes, inter alia, the Tax Administration and the Financial Intelligence Unit of the National Bureau of Investigation.
The leniency procedure has also been amended, as the scope of the summary applications has been extended. An undertaking may now lodge a summary application not only when it seeks to obtain immunity from fines but also when it seeks a reduction of fines in cartel cases. In addition, a summary application may now be lodged also after the FCCA’s inspection.
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Request for statement regarding proposed changes to procurement laws
The Ministry of Economic Affairs and Employment requests for statements regarding proposed changes to the procurement laws.
The Ministry has prepared a draft Government Bill, dated 14 June 2019, which would amend the procurement laws by introducing the use of electronic procedures in criminal record checks. The purpose of the Bill is to clarify certain rules relating to procurement procedures and rectify certain technical errors currently included in the procurement laws.
The Bill is to enter into force on 1 January 2020. The statements should be delivered to the Ministry at the latest on 6 August 2019.
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Binding targets for zero- and low-emission vehicles in public procurement
The Council of the European Union has recently adopted binding targets for zero- and low-emission vehicles in public procurement. According to the Council, the new rules will, inter alia, stimulate innovation. Zero- and low-emission vehicles will in turn help the EU meet its Paris Agreement commitments.
The new rules are set out in a draft directive amending the Clean Vehicles Directive (2009/33/EC). The scope of the rules is broadened in terms of the procurement practices covered. For example, refuse collection and postal delivery services fall within the scope of the new rules.
The new rules set out minimum procurement targets at national level for clean light-duty vehicles (passenger cars and vans) and heavy-duty vehicles (e.g. trucks). For example, the minimum procurement target in respect of clean light-duty vehicles of the total number of light-duty vehicles covered by the aggregate of all procurement contracts in Finland will be 38,5%.
The definition of a clean light-duty vehicle is based on CO2 emission standards, whereas the definition of a clean heavy-duty vehicle is based on the use of alternative fuels. For example, clean light-duty vehicles within the meaning of the directive are vehicles whose CO2 emissions are at the most 50 g/km by the end of 2025 and 0 g/km after 2025.
The Ministry of Transport and Communications will prepare national legislation implementing the new rules.
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Minimum share capital requirement of Finnish private limited companies removed as of 1 July 2019
Finland follows suit of the majority of the EU countries as the proposed changes introduced by Government Bill 238/2018 to corporate legislation regarding minimum share capital requirement of Finnish private limited liability companies were approved on 8 February 2019. The present requirement for a Finnish private limited liability company to have a minimum share capital of EUR 2,500 will be lifted as of 1 July 2019. Beginning from 1 July 2019, incorporating and registering a Finnish private limited liability company no longer requires its founding shareholders to make a payment to the company’s share capital. This will not, however, affect Finnish public limited liability companies which are still required to have a minimum share capital of EUR 80,000.
The removal of the minimum share capital requirement will also bring about indirect effects to, for instance, the incorporation and registration of a limited liability company, provisions on the reduction of the share capital as well as the provisions regarding the loss of the company’s equity.
Going forward, incorporating and registering a Finnish private limited liability company will be considerably more streamlined as the requirement to open a bank account to deposit the share capital will no longer form an obstacle to get a company up and running.
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Finnish transitional regime for investment services post-Brexit expected to be approved soon
The Finnish Government’s proposal for a transitional permissions regime and a third country firm licence was approved by the Parliament’s commerce committee on Tuesday. This means that UK firms are one step closer to being able to continue the provision of services post-Brexit.
The regime would enable UK credit institutions and investment firms to continue providing investment services and ancillary services into Finland post-Brexit. The transitional arrangements would apply to UK credit institutions and investment firms who currently have passported their home state licenses to provide investment services and ancillary services into Finland. In order to benefit from the transitional arrangements, a UK firm must apply to the Finnish Financial Services Authority (“Fin-FSA”) for a permanent third country licence before Brexit becomes effective. In order to be eligible for a third country licence, the third country firm must meet certain organisational and supervisory criteria that closely resemble branch requirements under Article 39 of MiFID II.
UK firms that do not apply to the Fin-FSA before Brexit for a third country licence will not be able to benefit from the transitional arrangements.
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A new Data Protection Act to enter into force soon
Somewhat belated, but on 13 November 2018 the Finnish Parliament approved of the new Data Protection Act (DPA), repealing the old Personal Data Act from 1999. The aim was to have the DPA approved already in May 2018, but the government proposal for the DPA was passed to the Constitutional and Administrative Committees for examination and their final statements were given in October. This led to the DPA being approved by the Finnish Parliament only in November 2018. As soon as ratified by the President of Finland the DPA will enter into force (probably still during 2018).
The DPA applies together with the GDPR in Finland and regulates such issues that have been left outside of the scope of the GDPR for member states to include in their own national laws, such as:
Offering of information society services to children: A child cannot lawfully give consent to the processing of his/her personal data for the purposes of offering information society services if not being at least 13 years of age (the age provided by the GDPR is 16).
Health related data: The DPA provides for a possibility to process health related data also in situations other than those allowed under the GDPR. For example, health related data may be processed by
- an insurance provider for the purposes of liability assessment
- in the operations of a health care service provider for the purposes of organizing or producing health care services
- in the operations of a social welfare service provider or when such a service provider grants benefits
- in the context of anti-doping work and sports of the disabled
- for scientific, historical research or statistical purposes.
Personal identity numbers: The DPA requires as a main rule that personal identity numbers are processed only by consent or if allowed under applicable laws. An exemption to this is however provided by the DPA, and personal identity numbers may be processed also
- when performing a task laid down by law
- in order to fulfil statutory rights and duties of data subjects and controllers
- for historical and scientific research or statistical purposes
- in credit, insurance, debt collection, payment service, rental, credit and health care operations
National supervisory authority: The relevant Finnish data protection authority is still the Data Protection Ombudsman, which has an office (expert organisation) with some 25 employees. A new feature is the expert board (under the office of the Data Protection Ombudsman) which gives statements on issues relating to the application of data protection laws.
Administrative fines: Only a special board consisting of the Data Protection Ombudsman and two deputy ombudsmen may decide on the imposing of administrative fines. Fines may not be imposed on public authorities and bodies.
In connection with enacting the DPA, also the Finnish Penal Code has been amended to include a new provision on data protection offences. Further, a new act on the processing of personal data in criminal matters and in connection with the maintaining of national security (implementing Directive (EU) 2016/680 on data protection in the police and justice sectors) will enter into force in connection with the DPA. It currently also awaits the ratification of the President of Finland.
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Broader new limitation on interest deductions
The deductibility of interest expenses has been limited since 2014, but only in relation to related party debt. Currently, interest expense is always deductible up to the amount of interest income. Further, interest expense exceeding interest income (“net interest expense”) is deductible provided that the amount does not exceed EUR 500,000. If the said EUR 500,000 threshold is exceeded, Finland applies a fixed ratio rule limiting a Finnish company’s tax deductions for net interest expenses on related party debt to 25% of its EBITD (as adjusted for tax purposes). For calculation purposes, however, both related party and third party debt are taken into account and in case the net interest expenses exceed EUR 500,000 even with 1 EUR, the entire amount is subject to the fixed ratio rule. The rules apply on a company-by-company basis, although, for example, amounts of group contributions are added back or deducted, as applicable, from the EBITD figure. Further, 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 addition, certain industry sectors, such as banking, insurance and most real estate businesses, are currently also excluded from the application of the rules.
In response to the Anti-Tax Avoidance Directive (ATAD I) compiling the BEPS issues identified in the BEPS project, the Finnish government issued last Thursday (27 September) a government bill (HE 150/2018) introducing new restrictions on the tax deductibility of interest expenses that are more consistent with the OECD recommendations. Under the government bill, the fixed ratio rule of 25% will remain, but the limitations will be extended to cover also third party debt. Similarly, the EUR 500,000 de minimis rule on related party debt will remain, but companies will, additionally, be faced with a net interest expense threshold of EUR 3,000,000 on third party debt. However, for calculation purposes, net interest expenses on third party debt are always deducted first and net interest expenses on related party debt may be deducted only to the extent that they are within the 25% fixed ratio rule, in circumstances where the total amount of net interest expenses exceed the EUR 500,000 threshold.
Contrary to the draft government bill issued in January 2018, this final government bill, however, upholds the exclusion of the banking and insurance sector from the scope of the rules. Also certain public infrastructure projects are proposed to be excluded from the scope of the restriction, but the extent of the excluded infrastructure projects is still under consideration. Apart from the foregoing exclusions, all businesses are effectively proposed to come within the scope of the new rules, although purely independent companies (non-group companies) will still be left out. Also the balance sheet test is proposed to remain, contrary to the earlier draft government bill. However, the final government bill provides that the balance sheets being compared should be prepared in accordance with the same accounting principles, or, alternatively, that the consolidated balance sheet at the group level should be converted to the taxpayer’s corresponding accounting principles in order for the test to apply.
Clearly, the EUR 3,000,000 de minimis rule on third party debt will target large businesses where the majority of the BEPS issues lie, which to some extent will minimise the impact on smaller companies. For real estate companies, the proposed new rules may have a particular impact on the cost of capital as they tend to be more highly leveraged in Finland compared with many other businesses. This could potentially affect their investment decisions and make some marginal investments uneconomic. Further, in the real estate business, EBITD is often also an ineffective way to measure debt leverage as a number of Finnish real estate companies have a fairly low EBITD due to their structure. Also, as real estate companies are currently not in a position to use the Finnish group contribution regime (which is an issue that is not addressed in the government bill), the impact on real estate companies could potentially be more severe compared to others, unless the group contribution rules are amended. Therefore, specific attention should be paid to real estate investment structures to comply with the new rules.
It should also be noted that the government bill includes a definition of interest that would be broaden its content when compared to the past. Interests would include also expenses related to the acquisition of debt financing, such as guarantee, withdrawal and credit fees as well as expenses related to amendment of financing terms and conditions. However, the government bill clearly determines that a so-called maintenance charge paid by shareholders of mutual real estate companies (and housing companies) should not be viewed as interest even though a part of the maintenance charge would, in itself, cover interest and other financing expenses of the mutual real estate company. This position is extremely important for the real estate sector, as a view to the contrary would have put the real estate sector under pressure to restructure and would have been in contradiction with the ultimate purpose of mutual real estate companies.
Finally, under the grandfathering rule, interest expenses on third party loans concluded before 17 June 2016 are outside the scope of the application. This exemption would, however, not apply to the extent that the terms and conditions of such loans are subsequently amended, which obviously can raise concerns of interpretation in the future.
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Finnish FSA issues new rules on governance under MiFID II
New guidelines on organisational requirements and operating procedures for investment firms, banks and other investment service providers were issued by the Finnish FSA with effect from 1 September 2019. The new guidelines provide updated requirements on investor protection, including detailed rules on safeguarding of client assets, product approval process and governance in general as well as more stringent rules on inducements. The guidelines follow the implementation of the Delegated Directive (EU) 2017/593 on safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees.
The new guidelines also establish the appropriate minimum level of professional experience for persons providing investment advice or advice on investment services and ancillary services, as well as for persons monitoring new employees. While the level of appropriate professional knowledge will continued to be determined by the investment firm itself, the Finnish FSA guidelines make a direct reference to the ESMA guidelines for the assessment of knowledge and competence (ESMA/2015/1886).
In its press release on the publication of the new guidelines, the Finnish FSA also announced that it is considering further updates to its guidelines on marketing of financial services and products as well as fit & proper standards and reporting.
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Government Bill 175/2017 regarding amendments to the subsidy scheme for renewable energy approved by the Finnish Parliament
The Finnish Parliament has on 23 May 2018 approved the amendments to the Act on Production Subsidy for Electricity Produced from Renewable Energy Sources (1396/2010) according to which a new technology-neutral production subsidy scheme for renewable energy sources based on a bidding process will be implemented. The new subsidy scheme will apply to wind power, biomass gas, wood fuels, solar power and wave power investments. Only new projects will be allowed to participate in the bidding process.
According to the amendments, an electricity producer whose power plant has been accepted to the relevant subsidy scheme through a technology-neutral bidding process will be paid a premium corresponding to the amount it has offered in its bid (on top of the market price). Such premium will be paid in full as long as the three-month average market electricity price does not exceed the electricity reference price (such electricity reference price being EUR30 per MWh). If the market electricity price exceeds the relevant electricity reference price (but is lower than the aggregate sum of the premium and the relevant electricity reference price), the premium amount will be decreased by the difference between the market electricity price and the relevant electricity reference price. Further, no premium will be paid in case the market electricity price exceeds the aggregate sum of the relevant electricity reference price and the premium amount.
If the electricity producer fails to produce electricity in accordance with its bid, the electricity producer will, at the outset, be obligated to compensate the Government for such underproduction. The subsidy may only be granted for a maximum period of 12 years.
The amendments referred to above will enter into force by decree as soon as the European Commission has evaluated the suitability of the relevant new subsidy scheme for the European Single Market, which is anticipated to take place by the end of 2018.
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