The Finnish interest deduction limitation rules from a corporation’s tax planning perspective
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School of Business |
Master's thesis
Authors
Date
2024
Department
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Mcode
Degree programme
Accounting
Language
en
Pages
99
Series
Abstract
This thesis studies the Finnish interest deduction limitation rules from a corporation’s tax planning perspective. The Finnish interest deduction limitation rules are enacted based on the European Union’s Anti-Tax Avoidance Directive (ATAD) which aims to decrease debt-based financing (debt-to-equity ratio) of companies. The reason for enacting such legislation is that the return for debt, interest, and the income for equity, dividend, are treated differently in business taxation of the payer. Interest expenses are, in case of no restrictions, tax deductible, whereas dividends not. Therefore, corporations aim to collect cashflows from their internationally operating companies as tax-deductible interest payments rather than non-tax-deductible dividends. Thus, this distinction creates an incentive for debt-based financing for companies. Briefly explained, the Finnish interest deduction limitation rules limit the tax-deductibility of interest expenses of a company. The Finnish interest deduction limitation rules are based on three rules: the 500 000€ rule, the 3 000 000€ rule and the 25% rule. Additionally, the legislation contains the so-called balance sheet comparison rule with which the taxpaying company can be freed from the interest deduction limitation rules and thus deduct entirely its interest expenses in taxation. Thus, the legislation is quite complex and contains exceptions. This study aims to take the viewpoint of a multinational operating corporation on the legislation. The aim is to get a general overview on the topic from a corporation’s perspective rather than focusing on one specific topic. There are two research questions: The first research question, which is the primary, deals with tax planning methods of Finnish corporations within the limitations of the Finnish interest deduction limitation rules. The second research question deals with the current macroeconomic situation, which is the rise of the general interest rate level and its relation to the legislation. The empirical part of this thesis was conducted with interviews. Hence, this thesis has a qualitative approach on the research questions. Totally 8 Finnish corporations were interviewed. Additionally, a representative of the Finnish Tax Administration and a tax consultant of a Big4 company were interviewed to get additional viewpoints on this issue. Based on the findings of the empirical data, there are several ways a company can tax plan in terms of the legislation both when applying the 25% rule and the balance sheet comparison rule. Based on the empirical data, it is quite hard to conclude whether the legislation has decreased the general leverage of companies to a large extent. Thus, the effects of the legislation regarding debt-to-equity ratio might be less impactful than hoped. Additionally, most of the corporations do not have taken any concrete actions regarding the rise of the general interest rate level in terms of the legislation. The author acknowledges the limitations of the study and the need for further research by interviewing a larger number of corporations. Additionally, some corporations might have limited their responses since corporate taxation is a sensitive topic. Hence these issues might have an effect on the answers and thus the analysis presented in this thesis. However, this thesis provides a good overview on the topic from a corporation’s tax planning perspective.Description
Thesis advisor
Ikäheimo, SeppoBeyer, Bianca
Keywords
Finnish interest deduction limitation rules, distinction between debt and equity, capital structure, balance sheet comparison rule, tax planning