Effective 1 January 2020, hybrid mismatch rules have been introduced, which are in line with the EU Anti-Tax Avoidance Directive (ATAD 2). The hybrid mismatch rules enable combating tax avoidance practices by neutralizing the effects of hybrid mismatches arising from payments or alleged payments between Finland and other countries and those between Finnish resident companies and non-resident related parties.
Transactions covered by the hybrid mismatch rules include:
- A hybrid financial instrument mismatch;
- A hybrid beneficiary entity mismatch;
- A hybrid payment mismatch;
- A hybrid mismatch based on double deduction;
- A hybrid permanent establishment mismatch;
- A hybrid mismatch arising from a transaction within a hybrid arrangement; and
- A reverse hybrid (effective 1 January 2022).
Tax adjustments are required if the mismatch in tax treatment of legal entities or financial instruments leads to:
- Double deduction – when the deduction of the same expense is claimed by both a Finnish entity and a foreign associated enterprise; or
- Deduction without inclusion – when a deduction of the expense is claimed by the payer without a corresponding inclusion of the income in the hands of the recipient.
Broadly, cross-border hybrid mismatches are neutralized by any one of two ways:
- Disallowance of deduction of expenditure under the hybrid arrangement to the extent that the corresponding income is not included in the tax base or is deducted twice; and
- Inclusion of the income arising from hybrid arrangement as taxable income to the extent that it is deductible for the payer.
The rules also provide for deduction of expenditures relating to arrangements of certain cross-border hybrid schemes. Further, limitation on foreign tax credits is also introduced in respect of hybrid arrangements to the extent of the amount of tax paid on income that is included as taxable income in Finland. However, it is clarified that such tax credits may not be treated as unused credits.
Effective 1 January 2022, the Finnish government introduced the reverse hybrid mismatch rules in line with the EU’s Anti-Tax Avoidance Directive (ATAD 2). The law provides that where a tax transparent entity is at least 50% directly or indirectly owned by a legal entity partner together with related partners or if a legal entity partner together with related partners has the right to receive at least 50% of its profits, the share of income from the transparent entity will be taxed in Finland if:
- The state of residence of such partner does not tax the income because that state considers the Finnish entity to be a separate taxpayer (an opaque entity); and
- The income is not taxed in Finland under other provisions.
However, the above reverse hybrid rule will not apply to a transparent entity that is an alternative fund within the meaning of the Alternative Fund Managers Act, which is in accordance with the exemption in ATAD 2 for collective investment vehicles.
The Finnish tax authority on 27 May 2022 published updated guidance on the taxation of certain cross-border hybrid arrangements providing additional guidance regarding the application of the reverse hybrid mismatch rules. The reverse hybrid mismatch rules do not apply if the non-taxation of the income of the Finnish transparent entity is due to any reason other than the reason of mismatch in the characterization of such entity for tax purposes. Further, for examining control over the Finnish transparent entity, its non-resident partners are considered as related to each other if:
- A natural person or entity holds, directly or indirectly, at least 50% of the voting rights or capital in the partners or has the right to receive at least 50% of the profits;
- One partner directly or indirectly holds in another partner at least 50% of the voting rights or capital or has the right to receive at least 50 % of the profits;
- A natural person or entity has significant influence over the management of the partners;
- One partner has significant influence over the management of the partner or partners; or
- The partners belong to the same business accounting group, i.e., a group consisting of those entities that have been included for the purpose of preparation of consolidated financial statements in accordance with international accounting standards or the Accounting Act.
Tax Information Exchange Agreements (TIEAs) provide for the exchange of information on tax matters, and Finland has concluded TIEAs with several countries, including Antigua and Barbuda, Andorra, Anguilla, Aruba, Bahamas, Bahrain, Belize, Botswana, British Virgin Islands, Brunei, Cayman Islands, Cook Islands, Costa Rica, Dominica, Gibraltar, Grenada, Guatemala, Guernsey, Isle of Man, Jamaica, Jersey, Liberia, Liechtenstein, Macau, Marshall Islands, Mauritius, Monaco, Montserrat, Netherlands Antilles, Niue, The Seychelles, San Marino, Samoa, St. Lucia, St. Vincent and the Grenadines, St. Kitts and Nevis, Turks and Caicos, UAE, Vanuatu.
In line with BEPS Action 5 and the EU directive on mutual administrative assistance, Finland has adopted various measures in its domestic laws to enable the exchange of information on cross-border tax rulings and advance pricing agreements (APAs) (see Sec. 13.3.4.) beginning from 1 January 2017.
Finland has adopted measures to implement the automatic exchange of financial account information with EU Member States pursuant to Council Directive 2014/107/EU of 9 December 2014, which synchronized EU rules with the global standard for exchange of information developed by the OECD under the Common Reporting Standard (CRS). Finland is also a party to the OECD Mutual Assistance Convention and the related Multilateral Competent Authority Agreement, and as such exchanges financial account information under CRS with qualifying non-EU countries. Further, on 5 March 2014, Finland concluded an Intergovernmental Agreement (IGA) with the US for the implementation of the US Foreign Account Tax Compliance Act (FATCA).
Finland has published the law implementing the EU Council Directive which requires the reporting of cross-border tax planning arrangements and mandatory exchange of information with the other EU Member States (DAC6). The reporting requirement primarily applies to intermediaries (service providers) that design, market, organize, or manage the implementation of a reportable arrangement. However, the reporting requirements may also be applied to the taxpayers in certain cases, including where an intermediary is a lawyer, authorized legal counsel, or a public assistant in accordance with the relevant law. In such cases, the intermediary is required to inform other intermediaries involved in the arrangement of reporting obligation or required to inform the taxpayer in the absence of an intermediary.
The requirements apply for reportable arrangements from 1 July 2020, with the disclosure of the reportable arrangements to be made within 30 days from the date when the arrangement is made available for implementation or is ready for implementation or where the first step to implementation has been carried out. However, reportable arrangements made during the period 25 June 2018 to 30 June 2020 are required to be reported by 31 August 2020.
Failure to comply with the reporting requirements may result in the following penalties:
- EUR 2,000 for minor omissions in reports or in the mandatory procedures ;
- EUR 5,000 for substantial omissions or completion of reporting only after requested by the tax authorities; and
- EUR 15,000 for deliberate or gross negligence.
Effective 1 January 2020, Finland has introduced exit tax rules in line with the EU Anti-Tax Avoidance Directive (ATAD 1) on the unrealized value of assets to be considered as taxable income as prescribed under the Act (see Sec. 11.1.).
Companies and legal entities, including limited liability companies, co-operatives, partnerships, insurance companies, and banks in Finland, are required to maintain information and register the Ultimate Beneficial Owners (UBO) in the Finnish Trade Register (UBO register). Certain companies such as companies listed in the Helsinki Stock Exchange, housing companies, mutual real estate companies, foundations, religious communities, and associations are not required to comply with the beneficial ownership reporting requirements.
Under the law, an ultimate beneficial owner means an individual who directly or indirectly hold at least 25% of the capital or voting rights of the entity or otherwise exercises ultimate control.
If a company does not have any beneficial owner as defined under the law, it is required to register details of the board members, managing director, general partner, or other similar members of the management in the UBO register.
The details of the beneficial owners of companies and organizations must be maintained in the UBO register starting from 1 July 2019. Existing companies are required to register the information by 1 July 2020. New companies are required to register the information at the time of incorporation. Any change in the ownership or information must be updated immediately.
A penalty of up to EUR 100,000 may apply to companies on failure to identify the beneficial owners or register with the UBO by 1 July 2020.