background image
13.1.1. Main Rules

There are no thin capitalization rules as such but interest limitation rules apply instead. Under the rules, the deductibility of interest expense for related party loans and unrelated party loans (effective 1 January 2019) is limited to 25% of the borrower’s earnings before interest, taxes, depreciation and amortization (EBITDA). Any interest expense offset by interest income is always deductible. Excess interest can generally be carried forward to future years. The interest deduction restriction rules are compliant with the EU Anti-Tax Avoidance Directive effective 1 January 2019.

Finland also applies a safe harbor rule whereby interest expense is deductible regardless of the EBITDA limitation if (a) the annual interest expense paid to related parties does not exceed EUR 500,000 and interest paid to unrelated parties does not exceed EUR 3 million (effective 1 January 2019), or (b) the Finnish company's equity-to-gross-assets ratio is greater than or equal to the group consolidated ratio (Balance Sheet based comparison).

In relation to unrelated party debt, an exemption from the deduction restriction is provided for loans taken prior to 17 January 2016, provided that the loan amount has not increased since that date and the terms have not changed. In all cases, the interest rate charged must be at arm’s length. If not, a possibility for application of the general anti-avoidance provision may exist.

The interest restriction rules are not applicable to the following:

  • Independent companies with no related companies
  • Financial undertakings
  • Interest on loans to finance long-term public infrastructure projects in the EU, which includes projects for the construction, renovation or acquisition of dwellings, for which a loan or interest subsidy has been obtained under specified laws

Companies under the following situations are not considered as independent companies if:

  • The company is a part of a business accounting group;
  • The company has a tax office abroad;
  • The company has a direct or indirect holding of at least 25% of the voting rights or capital of the other entity or a right to receive at least 25% of the profits of the other;
  • The company's voting rights, capital or profits are held by a natural person or another entity directly or indirectly at least 25%; or
  • The company has access to one or more other units on the basis of the direct or indirect participation of at least 25% of the entity or of another entity.

The tax authorities have published guidance on the interest restriction rules on 7 March 2019, which provides clarification on the deductibility of interest expenses, the scope of the interest restriction rules, determination of deductible interest expenses, reduction of non-deductible net interest expenses in subsequent years and the exception based on Balance Sheet based comparison. The guidance can be accessed here.