Finnish interest limitation rules stricter as of 2019

The long-awaited government proposal concerning new interest limitation rules was published on 27 September 2018. Changes to the interest barrier regime have been expected since 2016 due to the EU Anti-Tax Avoidance Directive, which sets out the minimum standards for the interest deduction restrictions.

Based on the proposal, the new rules in a nutshell:

• The most notable change is that also interest payments to banks or other third parties will be covered by the restrictions (currently only interest paid to related parties is targeted).
• An important extension is that all types of activities will fall under the scope of the limitations (currently only interest paid in "business activities" is restricted); this means a significant change especially for the real estate investment sector.
• As opposed to the draft proposal of January, many financial undertakings will continue to remain exempted from the restrictions, and the proposal now includes also an exemption on long-term public infrastructure projects relating to social housing production. Also qualifying "standalone entities" will be exempted from the restrictions. The proposal further includes certain grandfathering clauses concerning existing debts.
• The mechanism of the restrictions will partly remain and partly be changed:
  • Net interest payments being max. EUR 500,000 will remain deductible, as currently.
  • If the threshold is exceeded, only net interest payments up to 25 percent of the adjusted taxable profit (EBITD) are deductible, corresponding to the current rules.
  • However, net interest paid to other than "group related parties" will always be deductible up to EUR 3,000,000. It may be noted that the definition of group related parties corresponds to the current domestic law definition of related parties for transfer pricing purposes; it is not the same as the definition of an associated enterprise which is used when determining exempted standalone entities.
  • As opposed to the draft proposal of January, exemption of net interest deduction based on the balance sheet test would remain nearly the same as currently.
• Non-deductible interest expenses continue to be carried forward indefinitely.

The new limitations are intended to take effect as of the beginning of 2019.