Taxation of a Company Acquisition in Finland
The following sections provide an overview of the most relevant tax effects of a M&A transaction in Finland. We disregard tax effects under other jurisdictions. Parties in a cross-border transaction should be aware that tax effects may occur in all involved countries.
Share deals are generally not subject to VAT in Finland. In an asset deal, each individual transfer must be examined for its VAT treatment.
While most transfers will be subject to VAT, certain items, such as the transfer of shares (in a subsidiary) or other securities, or the transfer of real property and comparable rights, are exempt from VAT. For taxation, it is necessary to allocate portions of the purchase price to these items.
The transfer of assets may be exempt from VAT in its entirety if the transfer constitutes a business transfer, i.e. the transfer of a complete operational business unit. Project transfers will often be candidates for this exemption, but many are borderline cases. It is a good idea to account for this insecurity in the contract.
In general, the transfer of shares in a company is subject to a transfer tax under Finnish law. The tax rate is 1.6% of the purchase price in general, but 2.0% for real estate companies, i.e. companies whose operations mainly consist of owning or holding real property.
Unless agreed otherwise by the parties, the payment of transfer tax is a liability of the purchaser. If the purchaser is not a tax resident of Finland, liability shifts to the seller. Unless the company in question is regarded a real estate company, Finnish transfer tax does not become payable if neither party of the transfer is a tax resident of Finland, or a Finnish branch of a foreign financial institute or investment service provider.
In an asset deal, Finnish transfer tax becomes payable only as far as the transfer includes shares in a company (e.g. a subsidiary) or real property situated in Finland. For real property, the transfer tax rate is 4.0%. The notion of real property includes rights such as land leases. Portions of the purchase price have to be allocated to the assets subject to different tax treatment.
Income taxation of sales profits
Under Finnish tax law, profits made from the sale of any assets are generally subject to income taxation, in the case of corporations at the corporate income tax rate of currently 20%. This is true for a share deal as well as an asset deal. The tax is calculated on the basis of the difference between the agreed purchase price and the original investment(s) made by the seller.
As an important exception, the sales profit obtained from the sale of shares is exempted from sales profit tax if the shares belong to the operative assets of that business. The exemption will usually not be applicable for transactions by investors in project companies where the project does not interact with own business operations of the seller.
International tax law comes into play when the seller of a Finnish project is not a tax resident of Finland. In these cases, the relevant tax treaties between Finland and the seller’s home country determine Finland’s right to impose sales profit taxes.
Loss carryforwards in Finnish share deals
If the acquired company has carried-forward losses from previous financial years, the transfer of the company’s shares in a share deal involves the risk of forfeiting these losses for use in the current or future financial years.
The loss of all losses carryforwards is the general rule under Finnish law if more than half of the shares are transferred directly or indirectly. Upon application, the tax administration may grant an exemption “for special reasons, when this is necessary for continuing the corporation’s operations”.
Traditionally, the tax administration has been highly reluctant in granting exception permits. In the vast majority of share deals (outside of stock exchange listed companies), an exemption was not granted.
In recent years, Supreme Administrative Court decisions have led to a certain movement towards a more lenient practice, indicating that it should be sufficient if the company continues its operations after the transaction. It is too early to speak of a new established practice, and the stand of the tax administration with regard to the matter is yet somewhat undefined. For individual transactions, insecurity can be reduced by applying for an exemption. Such application can be filed before the actual transaction, outlining the same in sufficient detail in order for the tax administration to be able to make their conclusions.