Potential changes to tax-exempt real estate investments and dividends and tax relief on interest payments in Finland

A working group’s investigation on potential changes to tax-exempt profits derived from real estate investments and Finnish withholding tax on dividends will soon be complete. There is also a possible new Government Bill concerning limitations on tax relief on interest payments in the pipeline.

The working group, which was put together by the Finnish Ministry of Finance in 2020, will shortly be completing its work (its mandate is due to end on 31 May 2021). The group’s task is to evaluate two major reforms, which could affect foreign investors and tax-exempt entities operating in Finland.

First, the group is investigating the prospect of starting to collect tax on profits derived from the real estate investments of foreign funds and other tax-exempt entities in Finland by the year 2022. As part of their investigation regarding taxation on profits, the group is set to conduct an international comparison of how the planned tax could affect the investment industry and existing tax treaties.

The working group’s other task is to evaluate the possibility of introducing a 5% withholding tax on dividends payable to foreign funds (and other entities that are exempt in Finland) by the year 2022 in order to strengthen the tax base. The group is also assessing how the planned reform could impact the various operators in Finland, especially non-profit organizations.

If these contemplated reforms are implemented, they could result in substantial changes to the taxation of foreign funds and other entities (including non-profit organizations) that have to date received their profits derived from real estate investments in Finland and dividends without being taxed in Finland.

The reform concerning profits derived from real estate investments could give rise to major changes in particular for foreign investors who are operating in Finland. According to the working group’s list of tasks, their objectives are also to investigate how the planned reforms could impact Finland’s competitive position, safeguard the Finnish tax base and ensure that Finnish taxation remains predictable. Thus, the working group has to find a balance between these objectives.

The working group has not so far made any public suggestions, but it can be expected that the group’s suggestions are debated in the currently held government budget session. It is also possible that the session will result in more information regarding the reforms and some of the group’s suggestions could be published on 7 May 2021, when the results from the government budget session are expected to be announced.

Possible new Government Bill concerning limitations on tax relief on interest payments

The Finnish Ministry of Finance is currently also evaluating how to reform the existing Finnish tax relief on interest payments, especially relating to private equity structures. At the same time, the aim is to ensure that Finnish companies can continue to deduct interest relating to their investments.

The exact content of the reform is still unknown, but it could e.g. change the current de minimis EUR 500,000 threshold for deducting interest payments. The reform could also affect the current balance sheet ratio exemption rule (the so-called “escape clause”), whereby Finnish companies are permitted to deduct interest under certain conditions when a sufficient balance sheet ratio can be presented showing that the company has an equity to total balance sheet ratio that is higher than the consolidated ratio for its group.

The reform is expected to take effect in the beginning of 2022 and the Government Bill is estimated to be issued in early October 2021. The reform could lead to substantial taxation changes for foreign funds and other entities, which have investments and/or are using capital structures in Finland if the current rules are made more stringent.

What factors should be considered?

Even though the contemplated reforms are expected to take effect in the beginning of 2022 and possible Government Bills are expected to be issued this fall, it is possible that some of the tax changes will be introduced retroactively, i.e. they may enter into force as of the date the Government Bills are issued. Therefore, it is important to analyze and discuss in advance how the contemplated reforms could affect current and future real estate and capital investments and structures in Finland, and how foreign funds and other entities operating in Finland could prepare for the possible reforms.

We are currently carefully monitoring these legislative developments. We would be happy to discuss the new possible regimes and their potential effects on your business and structures in Finland.