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The Finnish Supreme Administrative Court: Payments based on interest derivative contracts are in the scope of the interest deduction limitation rules

The Finnish Supreme Administrative Court (SAC) issued an important ruling (SAC:2021:123) on 10 September 2021 on the application of the interest deduction limitation rules. The court concluded that payments based on interest derivative contracts are within the scope of the interest deduction limitation rules. In addition, the court provided some clarifications relating to the definition of related parties for purposes of the application of the interest deduction limitation rules. The decision is especially relevant for entities with interest derivative contracts and for certain joint venture (JV) structures with 50/50 ownership.

11 October 2021

Background of the case

The taxpayer had entered into an interest swap contract to hedge its loan against interest rate risk. Based on the contract, the taxpayer was required to pay fixed interest and premiums in exchange for fluctuating interest (Euribor) payments from a bank.

In addition to the bank loan, taxpayer also had shareholder loans from JV parties that indirectly controlled the taxpayer with 50/50 ownership and that were independent from each other. Based on the JV agreement, neither of the JV parties could appoint a majority of the board members and the chairperson did not have a deciding vote. If the JV parties were not able to resolve a tied vote, the JV would have been dissolved.

 

Decision of the SAC

The SAC decided that the payments made based on the interest swap contract (including fixed interest, payments due to negative reference interest, and premiums) should be considered as interest expenses when applying the interest deduction limitation rules and calculating the amount of net interest expenses. This was because the definition of interest expenses in the domestic law does not specifically exclude payments based on interest derivative contracts and there is an obligation to harmoniously interpret the domestic law in line with the EU anti-tax avoidance directive, which includes such payments within the definition of interest expenses.

The SAC also ruled that the interest expenses paid by the taxpayer to the JV parties should be considered as external interest expenses (i.e., expenses incurred with an unrelated party) for purposes of the interest deduction limitation rules, which apply differently to internal and external interest expenses. This was because the independent JV parties were not considered to be jointly managing the taxpayer within the meaning of the Finnish transfer pricing rules, and neither JV party had control of the taxpayer alone. In addition, the SAC considered that the consolidated financial statements prepared by a company directly under the JV parties covered the whole group for the purposes of the “balance sheet test” that, if applicable, provides a safe harbor from the interest deduction limitation rules.
 

Comments

The SAC’s interpretation of the definition of interest expenses that is set forth in the ruling expands the scope of the Finnish interest deduction limitation rules. Based on the Finnish legislative history and the guidance from the Finnish Tax Administration, payments based on interest derivative contracts usually have been considered outside the scope of the limitation rules. Considering the legislative history and the tax authorities’ guidance on the definition of interest, it generally should be considered reasonable to treat payments based on interest derivative contracts as interest expenses only going forward, and not to amend the treatment in previous tax returns due to the SAC’s new ruling. However, we suggest monitoring the possible further guidance of the tax administration. In addition, the decision clarifies the application of the interest deduction limitation rules in certain JV structures with 50/50 ownership.  

Tomi Viitala

Tomi Viitala

Salla Holma

Salla Holma

Joose Ahopelto

Joose Ahopelto

For further information, please contact:

Tomi Viitala
Tax Partner
Deloitte Oy
M: +358 45 7731 2025
tomi.viitala@deloitte.fi

Salla Holma
Tax Director
Deloitte Oy
M: +358 50 584 6308
salla.holma@deloitte.fi

Joose Ahopelto
Tax Manager
Deloitte Oy
M: +358 40 842 5745
joose.ahopelto@deloitte.fi

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