Two new Finnish precedents concerning the tax treatment of debt pushdown structures in M&A transactions

Foreign acquirers typically acquire Finnish businesses through the purchase of shares, commonly establishing a Finnish acquisition vehicle to carry out the acquisition. As a result, the interest on the acquisition debt can be offset against profit of the target company by utilizing the Finnish tax consolidation scheme or after a legal merger. Tax deductibility of acquisition debt relating to such an arrangement was already approved by the Supreme Administrative Court in the 1980s and related structures have been widely utilized ever since.

The Supreme Administrative Court recently published a precedent (KHO 2021:179) which confirms that this tax treatment is still applicable. The tax authorities had challenged the tax treatment based on case law (KHO 2016:72 and related cases) according to which the tax deductibility of interest on acquisition debt was refused in connection with the acquisition of shares in a Finnish company. However, this case law concerned the usage of a Finnish branch of a foreign company as the acquisition vehicle and the tax deductibility was refused based on the acquired shares not being attributable to the Finnish branch and the arrangement was deemed as tax avoidance (due to the fact the branch enabled the acquiring group to deduct interest twice, both in Finland and in its country of establishment). The Supreme Administrative Court held that these cases are not applicable to a debt pushdown arrangement where the acquisition is executed via a limited liability company.

The Supreme Administrative Court also recently published a precent (KHO 2021:178) with application to debt pushdown arrangements in cross-border M&A transactions. The non-Finnish target group indirectly held shares in a Finnish operating company. Three years after closing of the transaction, the shares in the Finnish operating company were sold internally to a group Finnish holding company. The Supreme Administrative Court refused deduction of the acquisition loan interest on the ground that the primary reason for the share transfer was tax avoidance i.e. pushing debt to Finland by means of a group internal transfer for the primary purpose of obtaining tax deduction on the interest. The court denied the EU law-based arguments relating to free movement of capital. This ruling has been heavily criticised as it seems that the Supreme Administrative Court is applying Finnish anti-avoidance rules more strictly than EU law seems to require.

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