Hannes Snellman Counsel to a Finnish Private Equity Fund in a Supreme Administrative Court Yearbook Case Confirming the Correct Application of Equity Ratio Exemption in Interest Deduction Limitations
24 September 2021
Finland has applied interest deduction limitations since 2014. Although the rules have been in force for over seven years, they have included a severe legislative gap until now. The rules include a so-called equity ratio exemption, which means that companies can deduct their interest expenses as long as the equity ratio of a single company is equal to or higher than the equity ratio of the group.
So far, there has not been any guidance at all from courts or the Tax Administration on how a “group” is determined in the context of private equity funds. The situation has been untenable from the point of view of legal certainty.
On 10 September 2021, the Supreme Administrative Court finally confirmed in an advance ruling that for Finnish private equity funds that are structured as partnerships (in Finnish: kommandiittiyhtiö), the correct application of the equity ratio exemption is that the equity ratio of a single portfolio company claiming tax deductions from paid interests on, for instance, shareholder loans is tested against the equity ratio of the fund.
The Court further observed that the law did not include guidance on any formal requirement on how it should be proved that the equity ratio of the company is at least equal to the equity ratio of the group. The Court explained now that the equity ratio of the fund/partnership should be determined based on the consolidated balance sheet of the fund prepared in accordance with the Finnish Accountancy Act, although the wording of the law requires a mere “clarification” of the equity ratios. This guidance was given in the Court’s advance ruling and advance rulings are only applicable going forward. When it comes to the tax years that are already closed – and in relation to which it has until now been unclear not only whose group equity ratio should be used, but also how this equity ratio should be clarified – it remains somewhat unspecified what clarification can be required. The ratio of the law is however clear: when a tax payer can prove that their equity ratio is the same or higher than the group equity ratio, the purpose of the law is to allow their interest deductions.