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Business Taxation Limitations Proposed
The Finnish Government has released the final government bill proposing limitations to the deductibility of interest expenses in business taxation. The goal of the proposed regulation is to secure Finland's tax base and to balance competition between domestic and foreign groups of companies. Taxand Finland discusses the limitations the government bill introduces to business taxation.
According to the bill, limitations will be applicable to corporations, partnerships, corresponding foreign entities and their permanent establishments. However, the limitations will not apply to financial, insurance, and pension institutions. Interest limitations only apply to business profits. This will exempt housing companies and certain other real estate companies from the scope of the restrictions.
The limitations will be applied only if the interest expenses exceed the interest income received by the company, i.e. if the company has net interest expenses. Interest may become non-deductible if the net interest expenses exceed 30% of the company's adjusted business profits (i.e. taxable business profits adjusted with the aggregate amount of interest costs, depreciations, losses and change in value of financial assets and group contributions received, deducted with the amount of group contributions paid).
A general safe haven of EUR500,000 will apply. If the net interest expenses (including third party and related party interests) exceed EUR500,000, the interest limitation will be applied to the entire amount.
At the moment, interest expenses are widely deductible in business taxation and deductibility can be restricted only by applying the transfer pricing regulation or the general provision for tax avoidance. Applying the new regulation will not require any deviation from the arm's length principle.