Finland introduces tax credit for major green transition investments

The Finnish government has released a highly anticipated draft government proposal on a tax credit for major investments supporting climate neutral economy for a consultation round. The proposed fixed term tax credit is expected to attract new green transition investments into Finland. The state aid in the form of the tax credit is enabled by the European Commission's Temporary Crisis and Transition Framework which also sets limits to the types of investments in the scope and the timing of how the credit can be granted. In this article, we take a closer look at the proposed tax credit and share our key takeaways.

For investments in the scope of the proposed legislation, the tax credit is 20% of the qualifying investment costs and maximum of EUR 150 million per group of companies. The amount is credited from tax starting in 2028 at the earliest. The annual credit cannot exceed 10% of the total tax credit and the credit can be used over maximum of 20 years. For qualifying investments, the tax credit is a significant benefit and represents a new type of instrument in the Finnish tax system where similar tax credits are rare.

Qualifying investment types

The following types of investments qualify for the credit:

• Investments accelerating the rollout of renewable energy and for energy storage.
• Investments related to decarbonisation of industrial production processes and for energy efficiency measures.
• Investments in sectors strategic for the transition towards a net-zero economy (production of batteries, solar panels, wind turbines, heat-pumps, electrolysers, and equipment for carbon capture usage and storage).

On the other hand, investments into the production of electricity, including wind and solar power, do not qualify for the tax credit.

Main prerequisites for the tax credit

• The investment needs to be a new investment. This means that the work cannot be started before the application for the tax credit has been filed apart from certain preparatory measures. For some of the investments, there is a requirement that the project needs to be completed within 36 months to be able to benefit for the full credit.
• The qualifying investment costs must amount to at least EUR 50 million. This threshold is likely criticized for being too high in the consultation round and it remains to be seen whether it will be lowered during the legislative process.
• The application for the tax credit can be submitted later in 2024 and must be submitted at the latest in 2025 so that the decision for the tax credit can be given before the end of year 2025. In addition, the tax credit needs to be claimed in the company's income tax return for the relevant tax year.

Key takeaways

• Review whether contemplated and early phase investments qualify for the tax credit considering the type of the investment and investment costs as well as timing of the project in addition to other relevant criteria. Consider the requirements from the proposed legislation in the timing of signing of contracts related to the potentially qualifying investment.
• Applications for the credit can be submitted soon after the government proposal is issued. Since the application submission date affects the determination of investment costs and when the work can be started, early filing of the application is in many cases beneficial.
• In the structuring of the investment the possibilities to use the credit needs to be considered. The company with the credit needs to be in a tax paying position to use the tax credits. Further, the tax credit can be forfeited in case of an ownership change or if the company with the tax credit is involved in a merger or a demerger, which may affect any plans to restructure the group structure or a potential future exit from the investment.
• For large multinationals, the interplay between the tax credit and global minimum tax rules can cause issues. The tax credit can lower the Finnish effective tax rate so much that a domestic top-up tax becomes payable neutralising the benefit from the tax credit.

What happens next?

The draft bill is subject to consultation round and the final government bill is issued thereafter. The legislation is also subject to the Commission's pre-approval due to its nature as state aid. No major changes are anticipated but the details of the legislation can be amended during the legislative process.

Our tax experts follow the legislative process closely. If you wish to discuss how your business can benefit from the tax credit, please do not hesitate to contact our tax specialists or your contact in the Energy team.