Embed Size (px)
Citation preview
733
Appendix 1
ABOUT THE AUTHORS
The InwardInvestment andInternational
Taxation Review
Law Business Research
Fifth Edition
Editor
Tim Sanders
The Inward Investment and International Taxation Review
The Inward Investment and International Taxation ReviewReproduced with permission from Law Business Research Ltd.
This article was first published in The Inward Investment and International Taxation Review - Edition 5
(published in January 2015 – editor Tim Sanders).
For further information please [email protected]
The Inward Investment and International
Taxation Review
Fifth Edition
EditorTim Sanders
Law Business Research Ltd
THE MERGERS AND ACQUISITIONS REVIEW
THE RESTRUCTURING REVIEW
THE PRIVATE COMPETITION ENFORCEMENT REVIEW
THE DISPUTE RESOLUTION REVIEW
THE EMPLOYMENT LAW REVIEW
THE PUBLIC COMPETITION ENFORCEMENT REVIEW
THE BANKING REGULATION REVIEW
THE INTERNATIONAL ARBITRATION REVIEW
THE MERGER CONTROL REVIEW
THE TECHNOLOGY, MEDIA AND TELECOMMUNICATIONS REVIEW
THE INWARD INVESTMENT AND INTERNATIONAL TAXATION REVIEW
THE CORPORATE GOVERNANCE REVIEW
THE CORPORATE IMMIGRATION REVIEW
THE INTERNATIONAL INVESTIGATIONS REVIEW
THE PROJECTS AND CONSTRUCTION REVIEW
THE INTERNATIONAL CAPITAL MARKETS REVIEW
THE REAL ESTATE LAW REVIEW
THE PRIVATE EQUITY REVIEW
THE ENERGY REGULATION AND MARKETS REVIEW
THE INTELLECTUAL PROPERTY REVIEW
THE ASSET MANAGEMENT REVIEW
THE LAW REVIEWS
www.TheLawReviews.co.uk
THE PRIVATE WEALTH AND PRIVATE CLIENT REVIEW
THE MINING LAW REVIEW
THE EXECUTIVE REMUNERATION REVIEW
THE ANTI-BRIBERY AND ANTI-CORRUPTION REVIEW
THE CARTELS AND LENIENCY REVIEW
THE TAX DISPUTES AND LITIGATION REVIEW
THE LIFE SCIENCES LAW REVIEW
THE INSURANCE AND REINSURANCE LAW REVIEW
THE GOVERNMENT PROCUREMENT REVIEW
THE DOMINANCE AND MONOPOLIES REVIEW
THE AVIATION LAW REVIEW
THE FOREIGN INVESTMENT REGULATION REVIEW
THE ASSET TRACING AND RECOVERY REVIEW
THE INTERNATIONAL INSOLVENCY REVIEW
THE OIL AND GAS LAW REVIEW
THE FRANCHISE LAW REVIEW
THE PRODUCT REGULATION AND LIABILITY REVIEW
THE SHIPPING LAW REVIEW
THE ACQUISITION AND LEVERAGED FINANCE REVIEW
THE PRIVACY, DATA PROTECTION AND CYBERSECURITY LAW REVIEW
PUBLISHER Gideon Roberton
BUSINESS DEVELOPMENT MANAGER Nick Barette
SENIOR ACCOUNT MANAGERS Katherine Jablonowska, Thomas Lee
ACCOUNT MANAGER Felicity Bown
PUBLISHING COORDINATOR Lucy Brewer
MARKETING ASSISTANT Dominique Destrée
EDITORIAL ASSISTANT Shani Bans
HEAD OF PRODUCTION Adam Myers
PRODUCTION EDITOR Anna Andreoli
SUBEDITOR Caroline Rawson
MANAGING DIRECTOR Richard Davey
Published in the United Kingdom by Law Business Research Ltd, London
87 Lancaster Road, London, W11 1QQ, UK© 2015 Law Business Research Ltd
www.TheLawReviews.co.uk No photocopying: copyright licences do not apply.
The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors’ firms or their clients.
Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of January 2015, be
advised that this is a developing area.Enquiries concerning reproduction should be sent to Law Business Research, at the
address above. Enquiries concerning editorial content should be directed to the Publisher – [email protected]
ISBN 978-1-909830-34-9
Printed in Great Britain by Encompass Print Solutions, Derbyshire
Tel: 0844 2480 112
i
The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:
ABOU JAOUDE & ASSOCIATES LAW FIRM
ÆLEX
AFRIDI & ANGELL
A&L GOODBODY
BAKER & MCKENZIE
BIRIŞ GORAN SPARL
BLP
BRATSCHI WIEDERKEHR & BUOB LTD
CASTRÉN & SNELLMAN ATTORNEYS LTD
CHIOMENTI STUDIO LEGALE
DAVID GRISCTI & ASSOCIATES
D’EMPAIRE REYNA ABOGADOS
DUANE MORRIS
ENSAFRICA
GALAZ, YAMAZAKI, RUIZ URQUIZA, SC (DELOITTE MÉXICO)
GORRISSEN FEDERSPIEL
GRAU ABOGADOS
GREENWOODS & HERBERT SMITH FREEHILLS
ACKNOWLEDGEMENTS
Acknowledgements
ii
GRETTE DA
HERZOG FOX & NEEMAN
KPMG LAW LLP
LEE & KO
LOYENS & LOEFF
MKONO & CO ADVOCATES
MOCHTAR KARUWIN KOMAR
MOTIEKA & AUDZEVIČIUS
NISHIMURA & ASAHI
NISHITH DESAI ASSOCIATES
PEPELIAEV GROUP
POTAMITISVEKRIS
QUEVEDO & PONCE
RÖDL & PARTNER
SIGUION REYNA, MONTECILLO AND ONGSIAKO LAW FIRM
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
SKATTEANALYS ADVOKATBYRÅ
SOŁTYSIŃSKI KAWECKI & SZLĘZAK
SRS ADVOGADOS
URÍA MENÉNDEZ
VEIRANO ADVOGADOS
iii
Editor’s Preface ...................................................................................................ix Tim Sanders
Chapter 1 BASE EROSION AND PROFIT SHIFTING ............................1Jennifer Wheater
Chapter 2 AUSTRALIA ...............................................................................8Adrian O’Shannessy and Tony Frost
Chapter 3 BELGIUM ................................................................................23Christian Chéruy and Marc Dhaene
Chapter 4 BRAZIL.....................................................................................44Silvania Tognetti
Chapter 5 CANADA ..................................................................................58KA Siobhan Monaghan
Chapter 6 CHINA .....................................................................................72Jon Eichelberger
Chapter 7 COSTA RICA ...........................................................................88Vittoria Di Gioacchino
Chapter 8 DENMARK ..............................................................................99Jakob Skaadstrup Andersen
Chapter 9 ECUADOR .............................................................................113Alejandro Ponce Martínez
Chapter 10 FINLAND...............................................................................126Sanna Linna-Aro, Kirsi Sävelkoski and Anne Vanhala
CONTENTS
iv
Contents
Chapter 11 FRANCE .................................................................................140Philippe Derouin
Chapter 12 GERMANY .............................................................................166Hans R Weggenmann
Chapter 13 GREECE .................................................................................178Aspasia Malliou, Dimitris Gialouris and Ifigeneia Efthimiou
Chapter 14 INDIA .....................................................................................190Nandini Pathak and TP Janani
Chapter 15 INDONESIA ..........................................................................213Mulyana, Sandi Adila, and Sumanti Disca Ferli
Chapter 16 IRELAND ...............................................................................229Peter Maher
Chapter 17 ISRAEL ...................................................................................250Meir Linzen
Chapter 18 ITALY ......................................................................................267Paolo Giacometti and Giuseppe Andrea Giannantonio
Chapter 19 JAPAN .....................................................................................284Michito Kitamura and Tsuyoshi Ito
Chapter 20 KOREA ...................................................................................299Young Uk Park and John Kwak
Chapter 21 LEBANON .............................................................................313Souraya Machnouk, Hachem El Housseini, and Ziad Maatouk
Chapter 22 LITHUANIA ..........................................................................326Mantas Juozaitis and Edvinas Lenkauskas
v
Contents
Chapter 23 LUXEMBOURG ....................................................................341Pieter Stalman and Chiara Bardini
Chapter 24 MALTA ...................................................................................359David Griscti
Chapter 25 MEXICO ................................................................................375Eduardo Barrón and Carl E Koller Lucio
Chapter 26 NETHERLANDS ...................................................................398Marc Klerks, Renée van der Maat and Louis Lutz
Chapter 27 NIGERIA ................................................................................414Theophilus I Emuwa and Chinyerugo Ugoji
Chapter 28 NORWAY ...............................................................................425Thomas E Alnæs and Elisabeth Hansen
Chapter 29 PERU ......................................................................................439César Castro Salinas and Rodrigo Flores Benavides
Chapter 30 PHILIPPINES .........................................................................455Ferdinand M Hidalgo
Chapter 31 POLAND ................................................................................465Jarosław Bieroński
Chapter 32 PORTUGAL ...........................................................................493Paula Rosado Pereira and José Pedroso de Melo
Chapter 33 ROMANIA .............................................................................508Gabriel Biriş and Ruxandra Jianu
Chapter 34 RUSSIA ...................................................................................526Andrey Tereschenko
Contents
vi
Chapter 35 SOUTH AFRICA ...................................................................536Peter Dachs, Bernard du Plessis and Magda Snyckers
Chapter 36 SPAIN .....................................................................................559Miguel Bastida Peydro and Laura Eguaras Córdoba
Chapter 37 SWEDEN ...............................................................................573Lennart Larsson
Chapter 38 SWITZERLAND ....................................................................586Michael A Barrot
Chapter 39 TAIWAN .................................................................................601Michael Wong and Dennis Lee
Chapter 40 TANZANIA ............................................................................611Nimrod E Mkono and Ofotsu A Tetteh-Kujorjie
Chapter 41 THAILAND ...........................................................................625Panya Sittisakonsin and Sirirasi Gobpradit
Chapter 42 UNITED ARAB EMIRATES..................................................639Gregory J Mayew and Silvia A Pretorius
Chapter 43 UNITED KINGDOM ...........................................................655Tim Sanders
Chapter 44 UNITED STATES ..................................................................679Hal Hicks, Moshe Spinowitz and Robert C Stevenson
Chapter 45 VENEZUELA .........................................................................704Alberto Benshimol and Humberto Romero-Muci
Chapter 46 VIETNAM ..............................................................................718Fred Burke and Nguyen Thanh Vinh
Contents
vii
Appendix 1 ABOUT THE AUTHORS .....................................................733
Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS .....759
ix
EDITOR’S PREFACE
Cross-border corporate structures and transactions are under ever closer scrutiny. While a global economy requires the free movement of capital, goods and services and legitimate cross-border financing and business acquisitions, governments are increasingly concerned by the potential this activity creates for artificial erosion of their tax base and are taking action to protect it. In response to this trend, the current edition has a chapter dedicated to ‘BEPS’: the OECD Action Plan on Base Erosion and Profit Sharing.
Recent, tangible examples of governments acting to protect their tax base include Notice 2014-52 issued by the US Treasury on 22 September, in response to US corporates relocating their headquarters to non-US jurisdictions. The Notice describes regulations that the US government intends to issue to curtail tax benefits of US corporate inversions where the transaction closes on or after the issue date of the Notice, with no grandfathering for signed but yet to be completed transactions. The Notice also indicated that the US Treasury is reviewing its tax treaty policy and the extent to which it is appropriate for inverted groups to obtain treaty benefits. A further example is the UK government’s plan to publish a consultation document on new measures to prevent multinational companies exploiting differences between countries’ tax rules through the use of ‘hybrid mismatch’ arrangements, the focus of action 2 of the OECD’s BEPS action plan on international corporate tax avoidance. In the UK Autumn Statement draft legislation was put forward to introduce a new UK tax called diverted profit tax at 25 per cent on profits deemed to have been diverted from the UK (1) through entities, including UK corporate taxpayers, or by means of transactions that deliver effective tax mismatch outcomes without sufficient underlying economic substance or (2) as a result of planning designed to avoid trading in the UK through a UK permanent establishment. These are not isolated examples.
The concern is that legitimate cross-border commercial activity will become caught up in attempts to curtail what governments regard to be artificial and unacceptable activity. At the extremes the distinction between what is genuine commercial activity and artificial manipulation is clear but there is a middle ground where legitimate commercial transactions and activity also generate tax benefits and how this area will be caught up
Editor’s Preface
x
in the drive to tackle perceived cross-border abuse is an area to watch. Whatever the obstacles, companies will continue to trade in the global economy, across borders and as governments increasingly target such activity there will be a pressing need for the adviser to consider the potential impact these initiatives could have on their clients’ tax affairs.
The aim of this book is to provide a starting point for readers, and to assist businesses and advisers, each chapter providing topical and current insights from leading experts on the tax issues and opportunities in their respective jurisdictions with a chapter on the overarching potential impact of BEPS. While specific tax advice is always essential, it is also necessary to have a broad understanding of the nature of the potential issues and advantages that lie ahead; this book provides a guide to these.
I should like to thank the contributors to this book for their time and efforts, and above all for their expertise. I would also like to thank the publisher and the team for their support and patience. I hope that you find the work useful, and any comments or suggestions for improvement that can be incorporated into any future editions will be gratefully received.
The views expressed in this book are those of the authors and not of their firms, the editor or the publishers. Every endeavour has been made to ensure that what you read is the latest intelligence.
Tim SandersSkadden, Arps, Slate, Meagher & Flom LLPLondonJanuary 2015
126
Chapter 10
FINLAND
Sanna Linna-Aro, Kirsi Sävelkoski and Anne Vanhala1
I INTRODUCTION
Finland is a republic with a multiparty system of parliamentary representative democracy. Legislative power is vested in the parliament of Finland, and the government has limited rights to amend or extend legislation. Executive power is exercised by the government, and the Prime Minister of Finland is the head of government. The President of Finland is the head of state, leads foreign policy in cooperation with the government and is the Commander-in-chief of the Finnish Defence Forces.
Finland has been a full member of the European Union since 1 January 1995. EU law is an integral part of the Finnish legal system, and Finland is the only Nordic country to have joined the eurozone. Finland has also acceded to several international treaties and conventions, including the UN Convention on the International Sale of Goods.
Finland has a highly industrialised, free-market economy with a per-capita output equal to other Western economies such as the UK, Germany, France and Sweden. Finland is highly integrated into the global economy, and international trade constitutes over one third of the gross national product. Finland has highly sophisticated education system and financial markets.
Notable companies include Stora Enso and UPM, respectively the largest and third-largest paper manufacturers in the world; Neste Oil, an oil refining and marketing company; and KONE, a manufacturer of elevators and escalators. Recently the game development industry has expanded thanks to fast-growing Rovio and Supercell.
Finnish domestic legislation recognises a number of legal entities, such as limited liability companies, cooperative societies, general and limited partnerships, branches of
1 Sanna Linna-Aro and Anne Vanhala are senior associates, and Kirsi Sävelkoski is an associate at Castrén & Snellman Attorneys Ltd.
Finland
127
foreign companies and non-profit associations and foundations. In this review, the tax analysis focuses on limited liability companies unless explicitly stated otherwise.
II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT
i Corporate
Businesses generally adopt a corporate form of either private limited liability company or public limited liability company. The applicable law is the Limited Liability Companies Act (624/2006).
Both corporate forms may be established by one or more individuals or legal entities. There are no restrictions on residence or domicile of the share owners in limited liability companies. Shareholders of the limited liability companies bear no personal liability for debts and obligations of the company. Their liability is restricted to the invested capital.
The main differences between public and private companies are the amount of share capital and negotiability of the shares. A private limited liability company requires a minimum capital of €2,500 where the minimum capital of a public limited liability company is €80,000. Shares of both corporate forms are transferable, but only shares of a public limited liability company may be subject to public trade.
One special commonly used corporate form is a mutual real estate company (MREC), through which Finnish real estate property is often held. An MREC is a limited liability company, the shares of which are attributable to certain parts of a real estate property owned by the company. In case of an MREC, rental income will accrue to the shareholder of the MREC instead of the real estate company.
A cooperative society is a legal entity whose main purpose is to support the production or business activities of its members by conducting sustainable business itself. Cooperative societies are commonly referred to as economic associations. Cooperative societies are not commonly used for conducting business in Finland by non-residents. The new Co-operative Societies Act (422/2013) has, however, brought this legal form closer to limited liability companies.
ii Non-corporate
Most common non-corporate entities for conducting business in Finland are limited partnerships. Limited partnerships provide for limited liability to the silent partner to the amount they have invested. On the contrary, the liability of the general partner is unlimited. Limited partnerships are commonly used in relation to private equity structures.
Partnerships are legal entities, but considered transparent for tax purposes. Thus they are only treated as accounting units, and any profits are taxed as income of the partners.
A branch is not a separate legal entity, but refers to a foreign corporation that engages in continuous business or trade activities in Finland from a fixed place of business. Branch offices are subject to income tax similarly to corporations, provided that the activities constitute a taxable permanent establishment here.
Finland
128
III DIRECT TAXATION OF BUSINESSES
i Tax on profits
Determination of taxable profitCompanies engaged in business activities are generally taxed under the Business Income Tax Act (360/1968). For companies that do not fall under the scope of the Business Income Tax Act (e.g., real estate companies), the applicable law is the Income Tax Act (1535/1992). Companies may also have two different income sources that are taxed under separate laws.
Companies incorporated under Finnish law are generally subject to unlimited tax liability, and thus they are liable to tax on their worldwide income. A Finnish branch is tax liable only on income attributable to the Finnish permanent establishment.
Certain types of income received by a foreign company will always entail tax liability, even if there is no permanent establishment in Finland (such as real estate income when the real estate is located in Finland).
In general, the taxable income of a business entity is calculated based on the profit and loss statement of the company. Generally speaking, all income is taxable and all expenses incurred in obtaining or preserving taxable income are deductible in taxation. However, certain adjustments are made based on tax legislation. For example, only 50 per cent of the entertainment expenses of a company are tax-deductible.
Generally, all arm’s-lengthbusiness related interest payments are tax-deductible by Finnish companies (or permanent establishments). However, the right of companies to make deductions from net interest expenses has recently been restricted through an amendment to the Finnish tax legislation (see Section VII.i, infra).
Finnish tax legislation allows certain tax depreciations, the amount of which may not exceed the depreciations made in the accounts. According to the Finnish tax laws, maximum tax depreciations are 7 per cent on warehouses, factories, logistic buildings and retail stores and 4 per cent on office buildings and comparables. The maximum depreciation for machinery and equipment is 25 per cent. No depreciation is allowed on land or shares. Immoveable property must be depreciated using a straight line method, over a life of at least 10 years or within a shorter period, shown by the taxpayer, over an estimated useful life.
Capital and incomeGenerally, capital gains and losses are taxed as part of ordinary business income. There are, however, certain types of income that may be only partly taxable.
As an exemption, capital gains arising from disposal of fixed asset shares are considered tax exempt (and losses non-deductible) upon certain preconditions. (See Section V.i, infra.)
In general, a dividend distribution between non-listed companies is tax-exempt. Dividend distribution from listed companies to non-listed companies is fully taxable, unless the non-listed company owns directly at least 10 per cent of the equity of the distributing company.
Finland
129
LossesVerified tax losses may be carried forward and used to offset business income for 10 subsequent fiscal years. Losses may not be carried back.
The right to carry forward the losses is, however, forfeited if more than 50 per cent of the shares of a company are sold during the year the loss is shown, or thereafter. The tax losses are also forfeited, due to an indirect ownership change, if such a majority share transfer has taken place in a company which owns at least 20 per cent of the shares in a loss-making company or partnership.
Upon certain conditions, a special permit may be applied from the tax authority to deduct losses despite the ownership changes.
RatesTax resident companies are subject to corporate income tax at a flat tax rate of 20 per cent. The corporate income tax includes the state tax and the municipal tax.
AdministrationThere is a single tax authority in Finland. The Taxation Procedure Law (1558/1995) provides the legislative base for the activities of the Finnish tax authority. Companies file and pay taxes annually. The tax year is the year during which the company’s accounting period ends.
It is possible to apply for guidance from the tax authority beforehand in the form of a preliminary ruling. The ruling in not of a general nature, but may be applied for in a specific situation. The tax treatment determined in the preliminary ruling binds the tax authority in that particular situation for the period of time determined in the ruling. (See Section IX.iv, infra.)
Tax decisions may generally be challenged through an appeal to the tax rectification board as the first appellate level, and further to the administrative court and the Supreme Administrative Court (upon the leave to appeal).
The Finnish tax authority carries out tax audits in all major companies, usually once every five years. Tax legislation allows tax reassessment on taxable income based on, for example, the tax audit covering five precedent years.
Tax groupingCorporations are taxed individually but consolidated tax grouping in the form of group contribution is available.
The group contribution system allows effective allocation of income among group companies, as it is taxable income for the receiving entity and tax-deductible for the paying entity. The group contribution is available between Finnish group companies and permanent establishments, provided that there is a minimum of 90 per cent (direct or indirect) ownership from the beginning of the tax year, that both companies are engaged in business activities (not financial, insurance or pension institutions), the companies have the same accounting period and the contribution is not a mere capital investment.
Other relevant taxesThere are also some indirect taxes relevant to conducting business in Finland, such as value added tax (VAT), payroll tax, transfer tax and withholding tax.
Finland
130
Finland levies a broad-based VAT on most goods and services. The general tax rate is 24 per cent, but reduced tax rates of 14 per cent and 10 per cent are also applied on certain types of goods and services.
Transfer tax is levied in Finland in relation to real estate transfers and to share transfers. The amount paid by the transferee is 4 per cent on real estates, 2 per cent on transfer of shares of a housing company or a real estate company or a company holding shares in aforesaid companies, and 1.6 per cent on other share transfers. The amount of tax is determined by the sale price or another consideration. No transfer tax is levied on the transfer of shares against cash consideration, subject to trade in a regulated public exchange.
Finnish employers and foreign employers with a permanent establishment in Finland are required to withhold a monthly payroll tax on the salaries paid. There are also other employer obligations related to, for example, pension and social security payments.
IV TAX RESIDENCE AND FISCAL DOMICILE
i Corporate residence
According to the tax practice, a corporate entity is regarded as Finnish when it is registered (incorporated) or otherwise established under Finnish domestic law. Further, the Finnish Income Tax Act includes a positive list of entities that are regarded as domestic entities. A corporate entity which is registered abroad or otherwise established under foreign law is not resident in Finland, and thus is subject to only limited tax liability in Finland. The place of management is not relevant in determining the residence of an entity.
ii Branch or permanent establishment
A non-locally incorporated entity may have a fiscal presence in Finland through a taxable permanent establishment. The concept of permanent establishment is defined both in the Finnish Income Tax Act and the tax treaties Finland is bound to. The definitions of the tax treaties are based on the OECD Model Tax Convention, but certain discrepancies exist between different tax treaties.
Generally, the permanent establishment is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The taxable permanent establishment can be constituted if the foreign company has one of the following in Finland:a a place of management;b a branch;c an office;d a factory;e a workshop, f a mine, an oil or gas well, a quarry or any other place for extraction of natural
resources, andg a dependent agent or representative.
A building site or a construction or installation project constitutes a permanent establishment only if it lasts longer than what the applicable tax treaty has defined as
Finland
131
the time limit. Generally, the time limit varies between six to 12 months in the tax treaties Finland is bound to. Also, preparatory and auxiliary activities are excluded as constituting permanent establishments for taxation. A case-by-case analysis based on business circumstances is, however, recommended in order to evaluate the tax consequences beforehand.
Permanent establishments are taxed similarly to resident corporate entities, such as Finnish limited liability companies. All the income generated by a permanent establishment is attributed to it, including its dividends, interests, royalties and capital gains for sales of assets. On the other hand, the business costs related to income generated by a permanent establishment are deductible. If the business operations of a permanent establishment result in losses, they will be deductible during the 10 subsequent tax years, with the same tax loss carry-forward rules as are in effect for Finnish corporate entities.
By way of exception from this rule, certain types of income received by a foreign company will always entail tax liability, even though there is no permanent establishment in Finland. Examples of such income include rental income and capital gains related to holdings of real property and buildings.
The Act on Elimination of International Double Taxation (1552/1995) governs the method for unilateral elimination of double taxation and elimination under a double taxation agreement. The credit method is the primary in most of the tax treaties Finland is bound to. In this method, credit is granted for taxes which have been paid for the same income and over the same time period and credit is given for taxes paid in the source state. The applicable tax treaty defines more explicitly the rules and procedure for the abolition of the double taxation.
However, many tax treaties restrict the treaty benefits to the beneficial owners. There are also many other types of tax avoidance provisions included in tax treaties. For example, certain companies may be expressly excluded from the scope of a tax treaty. Such exclusions may include, for example, companies that are not subject to normal taxes because of certain special domestic law tax benefits (limitation of benefits). Tax treaties also include provisions concerning cooperation and exchange of information between the tax authorities of the contracting states.
V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT
i Holding company regimes
Generally, for corporations capital gains and losses are taxed as part of ordinary business income. However, certain capital gains arising from disposal of fixed asset shares are considered tax-exempt, provided that preconditions laid down in legislation are met. Correspondingly, losses from disposal of such shares are non-deductible.
Tax exemption provides that: a the disposed shares entitle ownership of at least 10 per cent of the share capital in
the target company;b the disposed shares have been owned for at least one year; andc the disposed shares are determined as fixed assets of the vendor.
Finland
132
Tax exemption of fixed asset shares is only applicable to corporations with certain limitations, for example, the tax exemption does not apply to equity investors or to the sale of the shares in a housing company or real estate company. In addition, the target company must be either a Finnish company or a company to which the EC Parent–Subsidiary Directive (90/435/EEC) is applied, or there exists a double tax treaty between Finland and the resident state of the target company which is applied to the dividend payment of the company to be disposed of.
If the preconditions laid down for tax exemption are not met, capital gains are taxable and correspondingly losses are deductible. However, losses may only be deducted against capital gains on disposal of shares during the five years following the year of loss-making disposal.
Finnish-source dividends paid to foreign corporates are subject to a withholding tax in Finland at a rate of 20 per cent in 2014, unless they qualify for a domestic/EU exemption or an applicable tax treaty provides for a lower rate.
No tax is withheld if the dividends are paid to a company within the meaning of the Parent-Subsidiary Directive 90/435/EEC that holds at least 10 per cent of the capital of the payer company directly (Section 3.6, Act on the Taxation of Non-residents’ Income).
Also, no tax is withheld if the payment goes to a corporate entity resident in the European Economic Area that is similar to a Finnish corporate entity (this also concerns Liechtenstein, starting from 2011), and the dividends would be exempt from tax under Section 6a of the Finnish Business Tax Act (EVL) if a Finnish corporate entity had received them and the beneficiary does not receive a full credit for the Finnish tax in its country of residence (Section 3.5, Act on the Taxation of Non-residents’ Income).
ii IP regimes
In general, all the expenses relating to acquiring or maintaining business income are tax-deductible. This means that R&D expenses are fully tax-deductible regardless of whether the innovation is successful or not. No special innovation or patent box is available in Finnish taxation at the moment of writing this chapter.
iii State aid
Generally, no state aid is available for Finnish companies due to EU legislation.
iv General
Besides the wide network of tax treaties, the relatively low corporate income tax rate of 20 per cent is attractive to the foreign investors. Further, the real estate companies may fully deduct their arm’s-lengthinterest expenses in taxation. The same applies to unrelated party interests in sectors other than real estate.
Finland
133
VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS
i Withholding outward-bound payments (domestic law)
Finnish-source dividends paid to foreign corporates are subject to a withholding tax in Finland at the rate of 20 per cent unless they qualify for a domestic or EU exemption, or an applicable tax treaty provides a lower rate.
Payments of dividend to a (non-resident) foreign company are exempt from tax in the following circumstances:a The recipient of the dividend is appearing on the list of companies referred to in
Article 2(a) of Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different member states. Furthermore, the recipient also directly owns at least 10 per cent of capital in the company paying out dividend. Or, alternatively;
b The recipient’s tax domicile is in the EU or EEA (including Liechtenstein); and • the legal entity form is similar to a Finnish incorporated legal entity;• similar dividend would be exempt from tax if paid to a Finnish corporate
entity under Section 6a, EVL; and• no full credit can be made in the recipient’s country of tax domicile, as
explained by the recipient, under the provisions of the double tax treaty convention between Finland and the recipient’s country of tax domicile.
Payments of dividend to a (non-resident) individual are taxed as capital income when received from a listed company. The applicable withholding tax rate on dividends paid to a non-resident individual is 30 per cent. Generally, in treaty situations a lower rate is applicable. When the dividend is received from the non-listed company, the tax authorities accept, on request by the non-resident individual concerned, that the taxation can be carried out in a similar way as if the dividend recipient were a Finnish resident, under the following preconditions: a the non-resident individual’s tax domicile is EEA (including Liechtenstein); andb no full credit for the Finnish source tax could be available in the country of tax
residence.
Interests paid to non-resident corporate entities are not subject to Finnish withholding tax according to the Finnish domestic legislation.
Finnish-source royalties are subject to a withholding tax in Finland at the rate of 30 per cent paid to individuals and 20 per cent paid to corporates unless they qualify for domestic or EU exemptions or an applicable tax treaty provides a lower rate.
ii Double taxation treaties
Finland has a wide network of double taxation treaties. Currently, Finland has 70 double taxation treaties in force and is negotiating new treaties and updating older treaties. Taxation treaties Finland is bound to are based on the OECD Model Tax Convention.
Finland
134
iii Taxation on receipt
If the withholding tax is levied in Finland, generally the tax paid is credited in the home state of the recipient. The applicable tax treaty defines the method to be applied.
VII TAXATION OF FUNDING STRUCTURES
i Thin capitalisation
Finland does not have thin capitalisation rules in force. However, the deduction of interest expenses is somewhat limited, as explained in the following section.
ii Deduction of finance costs
As a general rule, all arm’s-lengthbusiness-related finance costs are tax-deductible by Finnish companies (or permanent establishments). Related interest expenses are subject to limitation rules under certain circumstances.
The right of companies to make deductions from net interest expenses has been restricted through an amendment to the Finnish tax legislation. The limitations are applicable to Finnish companies and general and limited partnerships, as well as foreign entities’ Finnish permanent establishments carrying on business activities. Both domestic and cross-border interest expenses are subject to the limitations.
If the net interest expenses exceed the annual €500,000 threshold, the expenses will be deductible to the extent that they do not exceed 25 per cent of the adjusted result of business (i.e., tax EBITDA). Net interest expenses exceeding this amount would not be deductible. The amount of non-deductible interest would nevertheless be, at most, the amount of interest paid to related-parties during the tax year.
The limitations are not applied to:a interests paid to a non-related party; b companies whose operations are not taxed as a source of business income (i.e., in
practice, real estate companies would be exempt from the limitation because their income is primarily taxed under the Income Tax Act);
c financial, insurance and pension institutions; d interest expenses which do not exceed €500,000 during the tax year; ande if the taxpayer’s equity to balance sheet ratio is equal to or higher than the
corresponding ratio of the adopted consolidated balance sheet.
In addition, the new rules include other detailed provisions related to the deductibility of interest expenses.
Costs related to the purchase of shares cannot be deducted immediately, but they are activated as a part of the acquisition cost of the shares.
In the asset deal, acquisition costs of business assets are added to the acquisition price and depreciated according to the applicable depreciation regulations related to the relevant asset.
Finland
135
iii Restrictions on payments
Dividend distributions are based on the distributable reserves in Finnish companies’ statutory financial statements, and the decision of the dividends is made in a shareholders’ meeting based on the board of directors’ proposal. The Finnish Companies Act also enables the distribution of interim dividend, namely, dividend distributed from the profit of the running accounting period. In this case, the interim accounts should be prepared and audited (if the company has an auditor) for the basis of dividend distribution.
Pursuant to the solvency test, assets shall not be distributed if it is known or should be known at the time of the distribution decision that the company is insolvent or that the distribution will cause the insolvency of the company.
iv Return of capital
The equity of a company shall be divided into restricted equity and unrestricted equity. In general, the restricted equity shall consist of the share capital and unrestricted equity shall consist of, among others, reserve for invested unrestricted equity, as well as of the profit from the current and the previous financial periods.
The assets of the company may be distributed to the shareholders by means of distribution of assets from reserves of unrestricted equity or the reduction of the share capital. The decision of the return of invested equity or the reduction of the share capital is made in a shareholders’ meeting based on the board of directors’ proposal.
The reserve for invested unrestricted equity can be repatriated to shareholders within the limits of the distributable reserves.
Reduction of the share capital is subject to capital gains taxation in Finland. In addition, according to prevailing tax provisions, the return of invested equity is considered as a capital event.
If the return of equity is equal to the amount previously injected as equity, capital gains should not arise as the corresponding cost of acquisition of the shares (i.e., the tax basis of the shares) is deducted on a euro-for-euro basis. If the equity return exceeds the acquisition price then the excess would be taxable as a capital gain.
As of 1 January 2014, the distribution of funds from non-restricted equity funds is, as a rule, considered to be dividends in taxation. As an exception, if it could be reliably shown that funds have ended up in the non-restricted equity funds through capital contributions which have taken place within 10 years of making the investment, and the repatriating entity is a non-listed entity, the repatriation of funds is treated as capital event, in other words, decreasing the acquisition cost of the shares in the same way as before. The exception would not apply to repatriation of funds by listed companies. Also, in such cases, repatriations of funds to foreign shareholders are treated as dividends and thus become subject to Finnish withholding tax. The new rules apply to new capital contributions made as of 1 January 2014. For capital contributions made before 1 January 2014, the new rules are applied to repatriation made on 1 January 2016 or thereafter.
Finland
136
VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES
i Acquisition
Typically, an entity resident in the EU or even in Finland is used when acquiring a business in Finland. A foreign company may incorporate a 100 per cent owned Finnish limited liability company, which will acquire the shares in a Finnish company. Depending on the circumstances of the relevant case, the Finnish company acquiring the business may be a newly incorporated entity or an off-the-shelf company. For tax reasons, a newly incorporated company is often used. The Finnish company may be funded with equity comprising share capital and non-restricted equity fund and shareholder loans.
Generally speaking, it is safer to introduce debt financing at the time of the acquisition rather than afterwards, because the Finnish tax authorities have recently tried to challenge post-acquisition debt push-downs. There is no specific legislation denying post-acquisition debt push-down, however, so it should still be possible; but careful tax planning is required and local advice should be sought. It should also be noted that tax planning is currently subject to public debate in the media and care should be taken into account in relation to maintaining good public image.
For example, Finnish companies may offset deductible interest against taxable profits through group contributions. However, this option is not available for real estate companies.
ii Reorganisation
Tax-neutral reorganisations such as mergers and demergers are available provided that certain requirements set out in the Finnish Companies Act and tax legislation are met. Special provisions on mergers and demergers are included in the Finnish Business Income Tax Act. The same provisions apply to domestic reorganisations and reorganisations involving a company from another EU Member State.
A merger is a general succession where the merging company is de facto liquidated and the assets and liabilities are transferred to the surviving company tax neutrally. In order for the merger to be tax neutral, it has to be in line with the tax legislation and company law.
In the merger, assets and liabilities are transferred to the surviving company on a going concern basis, in other words, no step up in the tax base and book values. The transferring company is not deemed to dissolve for the tax purposes. Cash may be used as a consideration, but it must not exceed 10 per cent of the nominal value of the new shares issued by the recipient company. The transaction is deemed to be a taxable event for shareholders to the extent that cash compensation has been used.
Under limited circumstances, a company can undergo a demerger without recognising tax on any gain, and without shareholders being taxed on receipt of either company’s shares. The Business Income Tax Act provides for two kinds of tax-neutral demergers: the complete demerger and the partial demerger. These are very tightly controlled transactions, with a number of conditions that must be met before the tax-free treatment is granted.
Finland
137
iii Exit
Finnish tax provisions provide for a participation exemption on capital gains where the Finnish resident vendor has held at least 10 per cent of the capital in the company for a period of at least for a year and the shares belong to the fixed business assets of the alienator. See detailed description of the preconditions in Section V.i, supra).
Finland does not levy tax on capital gains of a non-resident from the alienation of the shares in a Finnish or a foreign company unless the company is a real estate company or if the gain is connected with a permanent establishment in Finland.
Special provisions on an exchange of shares are included in Finnish domestic law. The special provisions also include an exit tax type provision concerning individuals. The tax benefit is lost if the taxpayer becomes a non-resident outside the EEA for Finnish domestic law or tax treaty purposes within five years from the end of the tax year in which the exchange took place. The exempted amount is taxed as income of the year, during which the taxpayer became a non-resident.
IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION
i General anti-avoidance
There is a general anti-avoidance provision in Finland that may be applied to both domestic and cross-border situations. In addition to the general anti-avoidance provision, there are also some other provisions aiming to prevent tax avoidance; for example, there is a provision on hidden profit distributions applicable also to the cross-border situations, and some anti-avoidance provisions applicable to mergers and demergers.
In addition to the anti-avoidance provisions in domestic tax legislation, there are also anti-avoidance provisions built into tax treaties, which are applied in Finland.
The general anti-avoidance provisions may be applied when there is a clear anti-avoidance purpose. In practice the provision may be applied to artificial arrangements where no independent commercial reason can be shown for the arrangement or when the arrangement is made in order to achieve unjustifiable tax benefits or to avoid taxes (i.e., substance over form principle).
This may cause, for example, taxation as dividend instead of interest or denying deductibility of interest or applying a preferable tax regime.
ii Controlled foreign corporations
Finnish corporate entities or resident individuals subject to unlimited tax liability in Finland must control the foreign corporate entity in order for it to qualify as a controlled foreign corporation (CFC) under the Finnish CFC regime. The required control exists if one or more persons subject to unlimited tax liability in Finland either: a directly or indirectly hold together at least 50 per cent of the capital of the
corporate entity or the total voting rights based on the shares; orb has or have the right to at least a 50 per cent share of the return on the capital of
the corporate entity.
In order for a foreign corporate entity or a permanent establishment to qualify as a controlled foreign corporation under the Finnish CFC regime, its actual income tax
Finland
138
burden in its state of residence must be less than three-fifths of the tax burden of a Finnish corporate entity resident in Finland. The general corporate income tax burden in Finland is 20 per cent, thus the CFC regime does not apply if the foreign taxes gross up to at least 12 per cent of the total profit.
CFC legislation would, however, not apply if the following conditions are met: a the entity is resident in a member state of the European Economic Area or in a tax
treaty partner state; andb the controlled entity is actually established in the host state and, objectively,
carries out genuine economic activities there.
In addition, an entity that resides in a state with which Finland has a tax treaty would not fall under the scope of application of the CFC regime if the following conditions are met: a the tax burden under the general corporate tax system of that state is comparable
to the corporate tax burden in Finland (its income tax burden must be at least three-quarters of the tax burden in Finland and in practice the tax rate must be 15 per cent or higher); and
b the entity has not been subject to a special tax benefit in its state of residence.
No CFC taxation occurs if the interest of individual shareholders (in the capital or right to profit) does not exceed 25 per cent.
iii Transfer pricing
The Finnish tax provisions in relation to transfer pricing are based on the arm’s-lengthprinciple and OECD Guidelines. Under the principle, the Finnish tax authorities may adjust the income of a Finnish corporate entity if its taxable income in Finland is reduced as a result of contractual or other provisions that differ from those that would have been agreed by unrelated parties.
Finnish companies are obliged to maintain transfer pricing documentation for transactions with affiliated parties. Generally, small and medium-sized companies are exempt from the documentation liability.
iv Tax clearances and rulings
Tax payers can apply for advance rulings from the Finnish Central Tax Board on issues involving, for example, income tax, value added tax, taxation of non-residents and withholding tax on interest. A precondition of the ruling is that the matter is considered to be important in relation to consistency of taxation, or may set a precedent, or other weighty reasons.
In addition, regional tax offices can issue advance rulings on matters involving, for example, income tax, value added tax, taxation of non-residents, withholding tax on interest, transfer tax and real estate tax.
No advance rulings are generally required to acquire a local business.
Finland
139
X YEAR IN REVIEW
In the past few years the Finnish tax authorities have centralised their transfer pricing monitoring to the Large Tax Payer’s Office, and thus more attention has been paid to the transfer pricing issues, especially in the tax audits. This has also increased the number of transfer pricing matters in the administrative courts. Although it seems that the approach of the Finnish tax administration to the transfer pricing matters has to some extent become stricter, the Finnish Supreme Administrative Court took a slightly different approach when it issued a ruling in favour of the taxpayer, stating that the Finnish legislative provision in question does not allow re-characterisation of a transaction in relation to the transfer pricing issue.
In recent tax and legal practice, certain structures have been challenged by the tax administration and Finnish Supreme Administrative Court. For example, in the previous ruling issued by the Supreme Administrative Court benefits received by a management through a holding company structure were considered as earned income under the general anti-avoidance rule.
At the tax office level it has been noticed that, for example, the tax authorities have been quite strict when interpreting a taxable permanent establishment of a foreign trader to exist in Finland. However, this strict interpretation practice has not been confirmed by the Supreme Administrative Court as no recent published case law exists.
XI OUTLOOK AND CONCLUSIONS
There are no major tax law proposals other than budget laws pending in the parliament at the time of writing this chapter.
There are parliamentary elections coming up in the spring 2015, which explains the quiet period for any tax law amendments. Any new proposals will be postponed until after the elections, and are prepared by the new government.
The general discussion is that the emphasis of the tax system should be shifted from the taxation of income to the taxation of consumption. The aim is also to maintain the competitiveness of Finland, which means that the tax incentives for entrepreneurs and business angels are discussed. However, no decisions have been made yet, and the result of the parliamentary elections in the spring 2015 will show the direction.
733
Appendix 1
ABOUT THE AUTHORS
SANNA LINNA-AROCastrén & Snellman Attorneys LtdSanna Linna-Aro specialises in tax law, corporate law, and mergers and acquisitions. She has participated in various transaction projects involving both Finnish and international corporations, and has advised companies in real estate transactions from a tax perspective. Her principal areas of practice are matters relating to all aspects of corporate and personal income taxation as well as general corporate law.
KIRSI SÄVELKOSKICastrén & Snellman Attorneys LtdKirsi Sävelkoski specialises in general corporate law and tax law. She regularly advises clients on issues related to all aspects of general corporate law. Her practice also covers various aspects of both domestic and international corporate taxation. Due to her competence in corporate law combined with her experience in tax law, Kirsi has been involved in numerous transaction projects.
ANNE VANHALACastrén & Snellman Attorneys LtdAnne Vanhala focuses her practice on tax law and general corporate law. She advises our clients in all aspects of domestic and cross-border tax law issues. Prior to joining Castrén & Snellman, Anne worked at Ernst & Young Oy assisting clients in domestic and international business taxation issues.
About the Authors
734
CASTRÉN & SNELLMAN ATTORNEYS LTDPO Box 233Eteläesplanadi 1400131 HelsinkiFinland Tel: +358 20 7765 765 Fax: +358 20 7765 001 [email protected]@[email protected] www.castren.fi
