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Proposed Limitations to Deductibility of Interest
The Finnish Government has released a draft regarding a bill to limit the deductibility of interest expenses in business taxation. The goal of this proposed regulation is to secure Finland's tax base and to balance competition between domestic and foreign groups of companies. Taxand Finland discusses how the proposed regulation changes may impact the tax position of businesses in Finland.
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 proposed limitation will not require any intention of tax avoidance or deviation from arm's length principle, but it will be applicable as a general rule.
According to the draft, limitations would be applicable to corporations, partnerships, corresponding foreign entities and their permanent establishments and in cases where the foreign entities have some other income subject to taxation under the Finnish Business Tax Act. The limitations would be applied only if the interest expenses exceed the interest income received by the company, i.e. if the company has net interest expenses.
Taxand Finland discusses the main aspects of the proposed regulation in more detail
The proposed regulation would allow an indefinite carry forward of non-deductible interest expenses. The use of this interest carried forward would require unused EBITDA in the fiscal year of use. Change of ownership would not affect the possibility to carry non-deductible interest expenses forward. Businesses should take a note of these proposed regulation changes in relation to their tax position.
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