Taxation of a project acquisition in Finland

Tax considerations are a key component of any project acquisition in Finland. Careful planning and documentation are essential to avoid unexpected liabilities and to optimize the transaction structure.

Value-added tax (VAT)

In general, share deals are not subject to VAT in Finland. However, asset deals require a more nuanced approach, as each asset class must be assessed individually for VAT treatment.

Most asset transfers are subject to VAT.

Certain items, such as shares in subsidiaries, real property, and comparable rights, are exempt from VAT.

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. Many project acquisitions fall into this category, but borderline cases are common.

To manage uncertainties, contracts should include provisions that allocate VAT risk and clarify how the purchase price is apportioned among taxable and non-taxable items.

Transfer tax

In general, the transfer of shares in a company is subject to a transfer tax under Finnish law. The tax rate is 1.5% of the purchase price.

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 3.0%. Importantly for most real-life projects, 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.

Unless agreed otherwise by the parties, 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 at all 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.

Income tax on 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.