Legal Updates
Legal updates covering current topics.
2019 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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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.
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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.
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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.
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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.
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