Legal Updates
Legal updates covering current topics.
2018 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.
For further information, please contact:
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.
For further information, please contact
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.
For further information, please contact
Government proposal promotes broader base for limitations 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 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 EBITDA (as adjusted for tax purposes). For calculation purposes, however, both related party and third party debt are taken into account and to the extent that the interest expenses exceed EUR 500,000, 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 EBITDA 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 Friday a draft government bill introducing new restrictions on the tax deductibility of interest expenses that are more consistent with the OECD recommendations. Under the proposed new rules, 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 calculations purposes, interest expenses on third party debt are always deducted first and interest expenses on related party debt may be deducted only to the extent that they are within the 25% fixed ratio rule, assuming that the total amount of net interest expenses exceed the EUR 500,000 threshold. It is additionally proposed that both the balance sheet test and the exclusion of banking, insurance and real estate businesses from the scope of the rules is abolished. Accordingly, 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.
Clearly, the EUR 3,000,000 de minimis rule on third party debt will target at large businesses where the greatest BEPS risks lie, which, accordingly, to some extent will minimise the impact on smaller companies. The new rules are generally not expected to impact on banking and insurance companies due to the significant net interest income arising from their main operating entities. However, it also means that the effectiveness of the fixed ratio rule could be reduced for groups (through the Finnish group contribution regime) that have, for example, banking type of activities alongside their other businesses. Nonetheless, also banking companies could temporarily find themselves in a net interest expense position as a result of, for example, impairment losses. The position is less clear for investment banking companies which may have leveraged balance sheets but at the same time generate significant non-interest income from advisory, underwriting, and equity or commodity trading businesses.
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. In the real estate business, EBITDA is sometimes also an ineffective way to measure debt leverage as a number of Finnish real estate companies, due to their structure, have a fairly low EBITDA. Also, as real estate companies are currently not in a position to use the Finnish group contribution regime, and unless these rules are changed, the impact on real estate companies could be more severe compared to others. However, if for example a real estate portfolio is split in a greater number of single real estate companies, each financed based on the target’s particular needs, the net interest expense per each single real estate company could be reduced to have the interest expense match the relevant threshold.
For further information, please contact
Finnish FSA issues guidelines on national language and filing requirements for KIDs under the PRIIPs Regulation
The PRIIPs Regulation (EU Regulation 1286/2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs)) entered into force on 1 January 2018. The objective of the PRIIPs Regulation and the corresponding delegated regulation is to provide retail investors with clear and summarised information on packaged retail and insurance-based investment products, presented in a uniform and harmonised manner in a Key Information Document (KID). The KID provides information on the key characteristics and complexity of the investment product as well as the related risks and costs. The purpose of the KID is to enable retail investors to compare and choose financial products based on clear, reliable and comparable information.
The Finnish FSA has in its PRIIPs newsletter and supervisory releases highlighted that KIDs presented to Finnish retail investors must in accordance with Article 7 of the PRIIPs Regulation be prepared in either Finnish or Swedish in order to ensure that the investor has sufficient understanding of the product. Furthermore, KIDs must be filed by either the manufacturer or the distributor with the Finnish FSA at the latest when the offering period commences in Finland. The filing is made for information purposes only and the Finnish FSA will not comment on or approve the KID. The language and filing requirements are applicable whenever KIDs are offered to investors other than professional clients, irrespective of whether the offer is made by way of public offer or private placement.
There are currently no available general exemptions with respect to the translation and filing requirements in Finland. The Finnish FSA will, however, collect information from market participants and reconsider the above language and filing requirements in connection with an upcoming review and recast of the FSA regulations and guidelines on marketing of financial products to investors in Finland.
For further information, please contact
Government Bill on implementation of MiFID II presented before Finnish Parliament
The Government Bill, including draft legislation on the implementation of MiFID II (Directive 2014/65/EU on markets in financial instruments), was presented before Finnish Parliament on 26 October 2017. The purpose of the proposed legislation is to implement the provisions of the MiFID II and make necessary adjustments to the currently applicable Finnish legislation as required by the MiFIR (Regulation 600/2014 on markets in financial instruments).
According to the Government Bill, the Finnish Investment Services Act (747/2012) will be amended to reflect the scope of application and exemptions included in the MiFID II. New provisions on
high-frequency algorithmic trading, product governance and the use of incentives, as well as specifications in relation to the safekeeping of financial instruments belonging to clients will be included in the Investment Services Act. The Government Bill also proposes the enactment of a new Act on Trading in Financial Instruments to reflect the MiFID II provisions regarding the operations of organized trading facilities and transparency requirements included in the MiFIR. Amendments to the Act on the Finnish Financial Supervisory Authority will also include a substantial increase of the sanctioning powers of the Finnish regulator.
The amended acts are expected to enter into force on 3 January 2018.
For further information, please contact
Finnish Tax Administration adheres to precedents on transfer pricing
The Finnish Tax Administration informed last week that it will follow the guidelines established by the Finnish Supreme Administrative Court (“SAC”) in two recent rulings dealing with transfer pricing arrangements between entities of the same corporate group.
The first ruling (KHO:2017:145) upheld the principle that the tax assessment shall, as a rule, be based on the legal form of the transaction. Accordingly, the application of the Finnish structural adjustment rule calls for strict formality and transactions may be recharacterized in accordance with its substance rather than its form only in exceptional circumstances and in cases of clear tax avoidance. The ruling emphasizes the parties’ freedom of choosing the form of the transaction and determining the applicable transfer pricing methods.
The latter ruling (KHO:2017:146) deals with appropriate charges for low value-adding intra-group services. The SAC held that to the extent intra-group services comprise of general administrative or back office and support services as provided for in the Chapter 7 of the OECD Transfer Pricing Guidelines, a profit margin of 3% will generally be deemed sufficient. Taxpayers are thus encouraged to review the applied profit margins and make necessary amendments already during the current tax year.
For further information, please contact
Finland to apply the ”establishment only” VAT grouping approach
Historically, charges between a head office and its overseas branches have been ignored for VAT purposes. The CJEU has in the FCE Bank case (C-210/04) held that where services are supplied between a head office and a branch, there is no supply for VAT purposes because the branch and the head office are the same legal person. Generally, this still remains the position.
However, in the Skandia case (C-7/13), the CJEU ruled that where an overseas branch is a member of a VAT group, it should be treated for VAT purposes as if it were a separate taxable person. Accordingly, in circumstances where services are supplied by a head office to a branch which is a member of a VAT group (to which the head office is not), there is a supply on which VAT should be charged. This approach is generally referred to as an “establishment only” VAT grouping.
The Finnish Central Tax Board has in a recent (not yet binding) ruling (KVL:2017:46) confirmed that Finland, in principle, applies the “establishment only” VAT grouping model. In the case at hand, the Central Tax Board held that services supplied by a Finnish branch to its UK head office are subject to a VAT charge in circumstances where the UK head office is a member of a UK VAT group to which the branch does not belong.
Where the Finnish branch can recover any Finnish VAT in full, this should have little practical impact. However, this VAT (which the branch may have to account for) could be a substantial additional cost for a VAT exempt business (for example banks and insurance companies) and affected businesses may need to consider how to structure internal supplies.
For further information, please contact
Proposed changes to the Finnish merger control regime – increased scrutiny in the social and healthcare sector
A Government Bill issued on 15 June 2017 proposes a temporary amendment to the Finnish merger control regime. According to the proposal, the merger control regime would, subject to certain exceptions, be applicable to all concentrations where at least one party provides social or healthcare services, or imaging or laboratory services related to healthcare services, in Finland regardless of the turnover of the parties concerned.
The proposal is related to the overall reform of the Finnish social and health care system, which is currently being considered by the Finnish Parliament. The proposal seeks to limit further consolidation in the sector and maintain a competitive landscape with a sufficient number of competing service providers.
The concept of “social and health care services” is broadly defined in the proposal and the scope of application of the amendment would, thus, cover a wide range of undertakings active in the sector. Moreover, the notification obligation would apply regardless of whether the turnover thresholds of the Competition Act are exceeded. This marks a significant departure from the main turnover based regime. A short-form notification form is expected to be introduced to alleviate the administrative burden of notifying parties.
The proposed new notification obligation does not apply to small operators or undertakings within the same group of companies. Moreover, the notification obligation does not apply to transactions where the target company, the merging party or the joint venture company to be established does not operate in the Finnish market for social, healthcare, imaging or laboratory services, or in any related markets. The latter exemption is intended to exclude from the notification obligation acquisitions by conglomerates and private equity companies of targets active in the social and healthcare sector outside of Finland and targets in Finland, which are not active in the social and health care sector.
The following concentrations are excluded from the scope of application of the proposed new notification obligation:
(i) concentrations where all parties are self-employed persons;
(ii) concentrations within the same company or the same group of companies;
(iii) concentrations, which involve only two parties and where one of the parties is a service provider with only five health care professionals;
(iv) concentrations where the target, the merging party or the joint venture company to be established is not active in the Finnish market for social or health care services, or
imaging or laboratory services, or any related markets.
The proposal also includes an amendment to the processing times of the competition authority in respect of concentrations in the social and healthcare sector. According to the proposal, the current Phase 1 period of one month is proposed to be extended to 45 working days.
No amendments are proposed to the substantive assessment of concentrations and, accordingly, the SIEC-test (“significant impediment to effective competition”) will be applied also to concentrations caught by the amended regime. Consequently, the competition authority will likely be able to intervene only in respect of a limited number of notified transactions. The authority is expected to scrutinize regional market conditions very closely and, apart from horizontal mergers, also vertical mergers and conglomerate mergers where the parties operate in neighbouring markets will likely be subject to detailed review.
The amendment is proposed to enter into force as soon as possible and will be applicable to transactions entered into after the amendment has entered into force (likely in autumn 2017) and before 1 January 2019. The Government Bill is currently still pending with the Finnish Parliament.
For further information, please contact
Reformed Finnish Anti-Money Laundering Act brings new obligations for many entities as per 3 July 2017
The Finnish legal regime for anti-money laundering has been reformed in connection with the implementation of the fourth Money-Laundering Directive (2015/849/EC). The new Act on Preventing Money Laundering and Terrorist Financing entered into force on 3 July 2017 and applies to all parties (entities and natural persons) having a statutory reporting obligation, such as, for example, banks, insurance companies, investment firms, gambling companies, realtors, auditors, lawyers and parties engaged in the business of trading in products, to the extent that a payment for such products by a customer is made in cash in an amount of at least EUR 10,000 (unless engaged in financial activities on an occasional or a very limited basis only).
The new legislation brings the following key changes to the Finnish anti-money laundering regulations:
(i) Obligation to draw up an individual risk assessment: Parties having a statutory reporting obligation must make a written risk assessment to identify and assess the risks of money laundering and terrorist financing. The risk assessment shall cover risk factors relating to i.a. customers, countries or geographic areas, products, services, transactions or delivery channels. Also internal policies, controls and procedures shall form a part of the individual risk assessment, the scope of which is determined by the size, nature and characteristics of the reporting party’s activities. The documents relating to the risk assessment must be approved, monitored and up-dated by a person belonging to the upper management such as the managing director, the board of directors or a signatory right holder. A written risk assessment must be put in place by 31 December 2017.
(ii) Obligation to declare beneficiary owners: All legal entities (with the exception of listed companies), must report their beneficial owners to a register maintained by the Finnish Patent and Registration Office (Trade Register). A beneficiary owner is defined as a natural person holding more than 25 per cent of an entity’s ownership or voting rights. If another legal person holds a share of 25 per cent of more in the entity, the natural person(s) who de facto has the right to make independent decisions in the holding entity must be identified. Also, when considering beneficiary owners, not only ownership and voting rights shall be taken into consideration but also, for example, the rights conferred by a shareholders’ agreements, bye-laws and other arrangements by which control de facto may be exercised. The registration obligation enters into force 1 July 2019.
(iii) Obligation to identify and keep information on a beneficiary owner: Any party that is under a statutory reporting obligation must also identify the beneficiary owners of its customers and keep adequate, accurate and current information on the identified beneficiary owners. The new register on beneficiary owners to be maintained by the Trade Register may be used in order to receive up to date information on such beneficial owners.
(iv) Obligation to establish independent and anonymous whistleblowing channel: Parties under a statutory reporting obligation will have to establish independent and anonymous whistleblowing channels for its employees for the reporting of suspected breaches of the anti-money laundering regulations.
(v) New tougher sanctions: The supervising authority is vested with the powers to issue penalty fees amounting to EUR 5,000-100,000 for legal persons and EUR 500-EUR 10,000 for natural persons. For severe breaches/neglects tougher penalty fees are available: credit or financial institutions can face penalty fees amounting to at most 10 per cent of their turnover for the previous year, or EUR 5,000 000, whichever is higher. Other parties under a reporting obligation can face penalty fees the amount of which can be twice the benefit derived from the act/neglect or EUR 1,000 000, whichever is higher. In addition, the supervising authority must publish its decision on imposing a penalty fee on its internet pages and have the decision available to the public for five (5) years. Only if it would be unreasonable to publish the name or decision of the sanctioned natural person or entity or if such a publication could endanger any official investigations, the supervising authority may decide not to publish the details or to leave the decision unpublished.
During the past few years the amount of reports made to the Financial Intelligence Unit (independent unit within the Finnish Central Criminal Police) has varied between 20,000-38,000 per year (some 37,000 reports were made in 2015). Of these reports around 10 per cent have been subject to further investigations. Especially banks, other payment intermediation service providers and gambling companies have been active in submitting reports.
For further information, please contact
Personal e-mail can be sent to lawyers via firstname.surname@ww.fi
VAT ID: FI10525214
