Finland

M&A and Taxation in Finland

To see why Finland offers great business potential, just look at the map. Finland is fully integrated with Europe, but right next to the booming market in Russia

A long history of survival between Swedish Kings and Russian Tsars. Goods and services flowing naturally east and west but with a very open economy also to any country globally. Today, world-wide export trading is an integral part of the culture within the business community.

The nearest markets — in the northern parts of continental Europe, the UK, Scandinavia, the Baltic countries and those parts of Russia bordering Finland — have a population base of about 250 million. Finland is a natural gateway to Russia (St Petersburg and the Kola Peninsula) and to the Baltic countries. Finnish strengths in working with these countries are logistics, cultural knowledge and language skills. Mergers between Finnish and Swedish companies ( Teliasonera, Storaenso, Tietoenator, Nordea, Tamro) have been driven by ambitions to build critical mass and consolidate the Nordic market with a clear interest to include the Baltic states as well in the “home market”. Forestry industry companies making pulp, paper and board and clustered companies in integrated machinery and engineering have been the first Finnish companies to become truly international (UPMKymmene, Storaenso, Metso).

In addition to being a world leader in forest-based industries, Finland has an advanced metal industry and pioneering electronics industry. Cellular phones, telecommunications equipment and other information technology, environmental technology, industrial automation, medical electronics, biotechnology and energy production technology are among the high-tech sectors in which Finland competes on a world-class level. An M&A case on Finland without Nokia can’t be made. Nokia itself is a story of a Finnish conglomerate with a portfolio of businesses in paper making, electrical power, rubber, cable, cable machinery, chemicals and consumer electronics transforming itself through numerous acquisitions and divestments to the Nokia we all know today. Nokia is certainly an excellent example of a company benefiting from Finnish education and technology innovation infrastructure.

Start-ups in Finland have benefitted from funding from many national programmes to attract entrepreneurs. The Finnish private equity and venture capital market has experienced significant growth in terms of both investors and operations. The Finnish private equity market is getting more international. For example, some Finnish venture capitalists and private equity houses have penetrated to Scandinavian markets. Also international private equity houses have found Finland and have established themselves in the Finnish markets.

Helsinki Exchanges provides four different listing environments for trading — the Main List, I List and NM List — as well as the Pre List for temporary trading needs and the Broker’s List Market for trading in the shares of unlisted companies. These alternatives cover the entire lifecycle of publicly traded companies; from those preparing for listing to established blue-chip companies with a proven track record and an established financial position. OMX has taken another step in the Nordic and Baltic integration process by harmonizing the industrial classification of listed companies in all of its exchanges. As from 1 July 2005 the Helsinki Stock Exchange, the Tallinn Stock Exchange, the Riga Stock Exchange and the Vilnius Stock Exchange introduced the GICS (Global Industry Classification Standard). Stockholm Stock Exchange and Copenhagen Stock Exchange have been using the standard since 2001. The standard will support and help those investing in the Nordic and Baltic markets as well as the listed companies by providing a comprehensive reference group that make reliable comparisons easier. Additionally, the classification will improve the visibility of the listed companies and help to better understand the core business of the companies.

Taxation in Finland

Finland has taken an active role to promote international business and investments through its tax regime. Generally globalisation, tax competition and EU law have had a major impact on the tax system. Finland is truly international: the country has an extensive network (over 60 treaties) of double taxation treaties in the areas of income and capital taxes. The treaties are based on the OECD Model Convention.

The parliament approved a significant tax reform in 2004. There are several new sections designed to make the tax system more competitive and favourable for various economic operators and foreign direct investments. The participation exemption regime on capital gains, coupled with the broad possibility to take interest deductions, group contribution regime as well as the lack of thin capitalisation rules and (in most cases) exemption from withholding taxes on Finnish-source interests provide interesting planning opportunities. There are also many tax-deferring options to reorganise legal structures. It is possible to obtain tax rulings to secure tax treatment in advance even in valuation issues.

Tax rates

The corporate income tax rate is 26%.

Taxation of dividends

Finnish rules allow in many cases tax-efficient and flexible profit repatriation. Generally, dividends from resident and nonresident companies will be exempt from tax in the hands of resident corporate shareholders. Intercompany dividends will nevertheless be taxable if:

• The distributor is a non-resident company other than a company listed in Art. 2 of the EC Parent-Subsidiary Directive;
• The recipient is a financial institution holding the shares as investment assets;
• The shares of the (domestic or foreign) company distributing the dividends are publicly traded and the recipient, being an unquoted company, owns less than 10% of the distributing company’s capital; or
• The dividends constitute a hidden profit distribution.

If the dividends are received from non-EU companies, Finland’s tax treaties usually extend the participation exemption to dividends from treaty countries. There are no holding period requirements, nor is the stake of holding relevant. Accordingly, as a general rule, even portfolio dividends from unquoted EU companies will be exempt.

Dividends paid to non-residents will be subject to withholding tax at the appropriate treaty rates (unless exempt under the EC Parent-Subsidiary Directive).

Capital gains and losses

Capital gains are exempted when a corporate taxpayer sells fixed assets shares that are deemed to belong to its business income (as opposed to passive income) basket if:

• The company has owned at least 10% of the share capital in the entity the shares of which are held for at least one year and the alienation does not take place more than one year after a company’s ownership in the entity falls under the 10% threshold;
• The alienated shares are not shares in a real estate or limited liability company the business activities of which principally consist of governing or owning real estate; and
• The company the shares of which are alienated is a Finnish company or a foreign company listed in Art. 2 of the EC Parent- Subsidiary Directive or a company resident in a treaty country in respect of dividends to which the provisions of the treaty would apply.

To ensure symmetry in tax treatment, it is ruled that capital losses derived from the sale of shares that could be alienated tax free should not be tax deductible. This symmetry is, however, not perfectly achieved as, in some cases, the denial of tax deductibility is extended to shares in respect of which capital gains remain taxable, eg for shares held in tax haven companies. Capital losses arising from the alienation of shares belonging to fixed assets that are not tax exempt may only be set off against taxable capital gains in the year of the alienation or the next five years.

Liquidation losses and write-offs on shares and receivables

There are significant limits on the option to claim deductions for liquidation losses. Corporate shareholders can only deduct these losses if their ownership in the liquidated company is less than 10% and they have held the shares for more than one year. Taxpayers may also not deduct write-offs for any shares belonging to the fixed assets and (other than sales) receivables that they have from companies in which their shareholding is at least 10%. A similar denial of tax deductibility applies to group contributions that Finnish parent companies have, under established case law, been able to give to their loss-making foreign subsidiaries, eg in the form of lower transfer prices or non-interest-bearing loans.

Contact details:
Matti Copeland, Partner (M&A Services) & Outi Ukkola, Partner (Tax), Deloitte & Touche Oy, Group of Companies - Tel: +358 20 755 500 - Fax: +358 20 755 501 - E-mail: firstname.lastname@deloitte.fi - Websites: www.deloitte.fi, www.deloitte.com.
The information provided in this article is of a general nature. Prospective investors should seek their own independent accounting and tax advice considering their own objectives and circumstances.

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