The Finnish parliament enacted on 29 December 2006 the law implementing the changes to the EC Merger-Directive brought about by Directive 2005/19/EC. The main features of the Finnish changes, that took effect as of 1 January 2007, are summarized below.
Introduction of partial division (split off)
As required by the Directive, the Finnish tax-neutral re-organization provisions now include the possibility for a partial division, whereby the splitting company is not dissolved, but continues to exist, and merely transfers part of its assets and liabilities, constituting one or more branches of activity, to another company by keeping one or more branches of activity also with itself. In exchange, the receiving company issues shares to the shareholders of the transferring company. The Finnish loss carry-forward rules were also modified accordingly to be in line with this new reorganization possibility.
Extending the scope of exchange of shares
The definition of "exchange of shares" is extended so that it allows further acquisitions beyond that granting a simple majority of voting rights.
Amending reorganization and loss carry-forward rules applicable to Finnish-based PEs
Further to confirming that Finnish PEs of foreign companies can be incorporated tax free in Finland, the parliament also enacted rules on taxation of Finnish-based PEs when the foreign company having the PE in Finland is subject to a merger, division or transfer of assets outside Finland.
Recapture rules for Finnish companies incorporating loss-making foreign PEs
The new rules also provide that any foreign PE losses deducted by the Finnish company 10 years before the incorporation of the loss-making foreign PE and which have not been subsequently covered by profits of the same foreign PE are recaptured upon incorporation.
Outstanding issues - scope
Finally, it should be noted that Finland did not implement any of the explicit provisions that the amended Merger Directive includes to ensure that the benefits of the Merger Directive are applicable, subject to certain exceptions, also to potential transparent entities included in the current list of companies covered by the Directive. It is thus expected that these questions may have to be solved through advance rulings and/or litigation in the future.
Transfer pricing documentation rules enter into force
The Finnish parliament enacted the law providing transfer pricing documentation requirements on 1 December 2006. The new rules, which in essence follow the proposal the government submitted to the parliament earlier in 2006, apply to fiscal years beginning on or after 1 January 2007. In addition to specific documentation requirements, the new rules also include an associated penalty regime with a maximum penalty of EUR 25,000 for each individual failure to meet the respective transfer pricing documentation requirements. The maximum penalty may accordingly be imposed several times (for each individual failure) in one single case.
The taxpayers must provide the documentation within 60 days to the tax authorities after they have requested it. The tax authorities may request the documentation to be provided at the earliest 6 months after the end of a fiscal year in connection with the regular assessment or during a tax audit.
The National Board of Taxes is currently preparing instructions regarding implementation of new transfer pricing documentation rules into practice. It is assumed that a circular letter will be published before summer 2007.