Government’s draft proposal for Interest Deduction Limitation Rules published for comments

The Ministry of Finance has published and asks for comments on the draft Government’s proposal for Interest Deduction Limitation Rules in line with the Anti Tax Avoidance Directive (ATAD). The draft proposal means significant tightening of the restrictions on interest deductibility compared to the current rules, and in some aspects restricts the deductibility of interest expenses more than the directive requires.

The current rules apply only to corporations and partnerships in their business income source. The proposed rules would apply to interests also in other income baskets, which would bring inter alia passive investments and real estate holdings under the restrictions.

Currently, the restrictions apply only to interest paid to related parties (as defined under the transfer pricing provisions, requiring control in form of, for example, majority of shareholding or voting power). The proposed rules would apply to interest paid to both associated and non-associated parties. However, the restrictions on the deductibility of interests paid to non-associated parties would be more lenient. The definition of associated parties would be based on the directive and cover, in addition to the current definition based on control, also direct or indirect 25 % ownership, control or profit share through a corporation or natural person.

Further, currently the restrictions apply only to interest expense, and even though the term interest is not defined in the tax law, the term has been established and covers only the actual compensation paid on debt finance. In line with the ATAD, the new interest deduction restrictions would apply to all borrowing costs including, in addition to interest, also, for example, foreign exchange gains and losses associated with the loans, guarantee fees, arrangements fees and similar costs. It should be recognized that, for example, the deductibility of the foreign exchange losses and expenses on borrowings is restricted but the deductibility of these items related to deposits and receivables are not restricted under said rules.

The maximum deductible net interest expense would be calculated similarly to the current rules and amount to 25 % of the tax EBITD, which is the taxable business profit added with gross interest expenses, tax deductible depreciations and received group contribution and subtracted with given group contribution. However, the taxpayer would be allowed to deduct the net interest expenses paid to non-associated parties up to a threshold of EUR 3 million. Net interest paid to associated parties would be deducted only after deducting the net interest paid to non-associated parties and provided the 25 % tax EBITD limit has not been reached.

The non-deductible net interest expense is carried forward and deductible during the following years subject to the 25 % tax EBITD restriction. Change of control in the company does not have an effect on the deductibility. These provisions and the provisions on the merger’s and demerger’s effect on the carry forward of the non-deducted net interest are similar to the current carry forward rules.

According to the draft proposal, the current balance sheet test would be abolished. The balance sheet test has had a significant impact on the restrictions during the years when the interest deduction restrictions have been in force and the abolishment restricts the interest deductions more than the ATAD requires. The ATAD allows a group test relief in form of a balance sheet test (that is slightly different from the current Finnish balance sheet test) or an EBITDA based test. The abolishment of the balance sheet test may be based on a political decision since the draft proposal refers to the Government’s political agenda.

Also the current exceptions covering entities within financial groups would be abolished. No clear grounds for this part of the proposal is articulated.

The deductibility of interest expenses would not be restricted provided the net interest expense does not exceed EUR 500,000. In this respect the new provision would be similar to the current provision, but tighter than what is required by the ATAD. In addition, the restrictions would not apply to stand alone entities (based on the associated party definition).                   .

The new restrictions would apply to tax year 2019 and following tax years, i.e. accounting periods that end on or after 1 January 2019. Consequently, for companies whose accounting period ends during the first months of the calendar year, the new provisions are applicable relatively soon.

Please notice that, currently, only a Draft Government’s Proposal has been sent for comments, and it may be assumed that some changes will be introduced based on the comments received. We expect that, for example, the abolishment of the balance sheet test and not applying the threshold also to intra-group interests will raise comments. We will monitor and participate in the discussions with the Ministry of Finance.

We are happy to tell you more about the draft proposal and its possible effects on your Finnish tax burden. In addition, we are able to bring forward your concerns concerning the contents of the draft interest deduction restrictions.


Mika Ohtonen 
Merja Raunio 
Senior Advisor