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Hybrid instrument classfication due to TP adjustment


On 29 May 2013, Helsinki Administrative Court rendered its decision in a case concerning the deductibility of interest on a hybrid loan from a Luxembourg S?rl parent company to its Finnish subsidiary. Taxand Finland discusses the background to the case.

In 2009 the Large Taxpayer's Office had adjusted the tax return of the subsidiary by adding the interest paid to the Parent to the taxable business income of the Company, amounting to EUR 1.34M based on a transfer pricing adjustment which reclassified the hybrid loan as equity. The Board of Adjustment of the Large Taxpayer's Office also stated that despite the de jure characteristc of the loan, based on the transfer pricing adjustment, it was in fact an equity investment whereby the return paid was not tax-deductible.

The subsidiary argued that any potential reclassification would require applying the general anti-avoidance clause, ie Section 28 of the Finnish Taxation Procedural Act (FTPA). FTPA states that if certain circumstances or actions are performed in a form or manner not representing the actual nature or purpose of the matter, the taxation of the matter shall be carried out based on the actual form.

Relying merely on principles set out in the OECD Transfer Pricing Guidelines would violate the Finnish Constitution. The evaluation of the characteristics of a certain hybrid loan and the deductibility of interests related to it, should therefore be made based on the interpretation of Finnish domestic internal legislation.

In its decision, the Court overruled the decisions made by the Large Taxpayers' Office and the Board of Adjustment and stated that disregarding the de jure characteristic of the loan based on transfer pricing adjustment was not admissible.

Discover more: Classification of a hybrid instrument as debt or equity due to transfer pricing adjustment


Your Taxand contacts for further queries are:
Janne Juusela
T. +358 9 6153 3431

Jarno Makela
T. +358 9 6153 3224


Taxand's Take

In Finnish taxation, the distinction between equity and debt related instruments have been a repeating issue before tax courts. This ruling is not yet binding and even the decision of the Court was not unanimous. A final decision in the matter will hopefully shed more light and guidance to the distinction between applying Sections 28 and 31 of the FTPA and the factual scope and content of Section 31 of the FTPA.

Taxand's Take Author

Janne Juusela