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New Finnish guidelines for large-scale enterprises don’t comply
The Finnish Large Taxpayers’ Office (LTO) has issued guidelines to various Finnish large-scale enterprises regarding the deduction of transaction costs and the VAT treatment of interests and treasury functions. The new guidelines provide that costs incurred in relation to borrowed money are not deductible for VAT purposes. The same instruction applies to treasury functions and other inter-company financial services too. Taxand Finland discusses how these new guidelines are not compliant with previous tax practice.
The Finnish LTO has issued authority-initiated guidelines to various Finnish large-scale enterprises, in which it has provided further instructions on the following issues:
- Deduction of VAT on transaction costs incurred on sales of shares and real estate
- Interests received from group companies
- Treasury functions and other financial services supplied to group companies
- The impact of these activities on the deduction of overhead costs
VAT deduction in connection with transaction costs has been an area of interest in recent tax audits in Finland. These new guidelines are in line with the views the LTO presented in these VAT audits, in which they refer to the case law of the Supreme Administrative Court. However, it is problematic that the case law to which the LTO refers does not relate to companies solely carrying out VAT taxable activities. In addition, the Finnish tax authorities seem to widely apply the case law of the Court of Justice of the European Union to different circumstances. As a result, there are currently several appeals pending before the courts. We therefore expect that new case law on this issue will be published soon.
Furthermore, it is provided in the guidelines that costs incurred on interests are not deductible for VAT purposes and they need to be considered in the deduction of overhead costs. In earlier Finnish tax practice companies carrying out merely taxable business but having some incidental financial transactions have not been required to adjust the VAT deduction of overhead expenses as a result of these incidental transactions although Finland has not implemented the pro rata calculation in the Article 174 of the VAT Directive (2006/112/EC). The same applies to treasury functions and other intercompany financial services. In the view of the LTO, in no circumstances can the financial service elements can be considered ancillary and thus to be absorbed by the management fee further to the ECJ principles (C-349/96 Card Protection Plan Ltd). Consequently, they are subject to VAT even if they were bundled in the management fee. Moreover, these activities should impact the deduction of overhead costs of the group company receiving the interests and charging for treasury functions and other financial services.
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These guidelines are not in compliance with the established tax practice in Finland and are not supported by any recent ECJ case law either. Therefore, it is recommended that companies which have received similar guidelines, or any other companies carrying out the activities described above, should carefully consider their position towards the VAT treatment of these activities. It may well be that the tax authorities will start challenging the VAT treatment of the described operations and the relating VAT deductions regardless of whether the company in question has received the mentioned guidance. However, taking into account that these guidelines are not in compliance with the previous tax practice, multinationals should avoid making any rushed decisions based on these guidelines.
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