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Supreme Administrative Courts decision on TP

Finland

Also published in Thomson Reuters' Taxnet Pro, 10 July 2014, and in Bloomberg BNA, 6 August 2014

On 3 July 2014 the Finnish Supreme Administrative Court rendered its decision on a case concerning a hybrid loan to a Finnish limited liability company from its main owner based in Luxembourg. Taxand Finland explains how the interest paid on the loan was deductible in the taxation of the Finnish subsidiary.

In said case the Finnish limited liability company had been financed by a 15 MEUR loan from the Luxembourg company in 2009 to alleviate the financial difficulties resulting from the general financial downturn. Tax authorities had claimed that the loan should be treated as equity instrument in taxation based on the Section 31(1) of Finnish Taxation Procedure Act, whereupon the interest would not have been tax deductible. Re-characterisation would have been made referencing to the OECD transfer pricing guidelines. 
  
SAC ruled that disregarding the business transaction agreed upon by the parties and re-characterising the transaction would have required an explicit authorisation for re-characterisation under a specific regulation of Finnish Taxation Procedure Act. As Section 31 (1) did not contain such a rule, SAC ruled that the re-characterisation may not be done based on it. Furthermore SAC confirmed that the interpretation of Article 9 of the tax treaty may not overrule domestic tax regulations. This effectively meant that the OECD transfer pricing guidelines (especially paragraph 1.65 contained therein) may not be used in re-classification without specific support from domestic tax law.

Discover more: Finnish Supreme Administrative Courts decision on Transfer Pricing


Your Taxand contact for further queries is:
Janne Juusela
T.+358 9 6153 3431
E.janne.juusela@borenius.com

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Taxand's Take

The case can be seen to confirm several important aspects. Firstly reclassification shall be made under Section 28 of the Finnish Taxation Procedure Act, and not based on Section 31. Secondly sovereignty of the Finnish tax law in comparison to international guidelines was maintained. OECD TP guidelines may be used as indicative guidance, but not as decisive grounds for reclassification.

Taxand's Take Author

Janne Juusela
Finland

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