The taxation of interest payments between associated enterprises

Abstract

Topic: The study is linked to the concept of a group of companies. A group is at the same time a legal and economical phenomenon. An international group of companies consists of companies and permanent establishments located in different states. The study covers not only subsidiaries to be consolidated to the group financial statement, but also associated enterprises where the group’s ownership can be below 50% and which will not, therefore, be consolidated. Such associated enterprises which do not belong to the group under accounting and company laws can have a firm connection to the group. Regarding taxation, attention will be paid to the conditions and terms concluded inside the group. Adjustments can also become a factor in relation associated enterprises which are not consolidated if the conditions and terms concluded deviate from what would have been agreed on at the open market.

The main goal of the thesis is to find out how international regulation created within the OECD and EU harmonises the taxation of interest payments between associated enterprises. The study consists of the levels of tax treaty law, European Community law and domestic tax law. From these three levels, the focus is on European Community law or in a wider context on the European Union. The main research methods are legal dogmatic and comparative law.

The comparative part of the study focuses on the tax systems of the United States of America, Germany, Estonia and Finland. The macro level comparison covers not only domestic international laws, tax treaties, case law and other official documents, but also customary methods of interpretation, ways of transposing international agreements into the national legal order and carrying out international law obligations in the respective countries. These countries have been chosen from the Finnish point-of-view. The United States was a significant capital exporting country before the current economical recession. The U.S. tax treaty policy and domestic international tax laws have had a great impact on other countries’ tax systems. Economically, Germany is the most powerful country in the EU. Relatively speaking, most of the preliminary references referred to the European Court of Justice dealing with direct income tax law are made by German courts. Estonia is interesting from the Finnish perspective due to geographical reasons and tax competition.

The study also covers the Swedish tax system quite deeply. Sweden was not included in the macro level comparison because group taxation systems are similar in Finland and Sweden. The two countries also joined the EU at the same time. Micro level comparison, which examines specific legal institutions, was carried out with Belgium, Denmark, France, India, Mexico and the Netherlands as examples.

Structure The study has ten chapters. Chapter 1 describes the goals, methodology, limitations and sources of the thesis. Chapter 2 presents principles and goals which affect interpretation of tax law. The principles of legality and equality may be legally enforced, whereas ability to pay, neutrality and fairness are goals for the improvement of the society’s social feature. Chapter 2 first discusses the sources of international taxation from international law and treaties before and moving on to international tax law and its interpretation. European tax law is studied from a critical perspective. The impact of acquis communautaire on national tax systems has been compared to a jack-in-the-box which lowers the predictability of tax assessment.

Chapter 3 deals with the history of direct tax harmonisation and the current possibilities to cross-border loss-relief. The European Commission’s initiatives for group taxation - Common Consolidated Corporate Tax Base and Home State Taxation - are discussed. Thin capitalisation and transfer pricing problems would be eliminated if these initiatives were adopted. Companies taking part into unitary taxation would be fiscally consolidated at a group level. Corporate tax harmonisation could go further than this in theory. An EU tax would eliminate the current constitutional problems. The EU tax would create a direct tax link between the EU and its citizens. The EU’s political accountability would be improved if the European Parliament’s involvement in the adoption of tax laws was increased.

Chapter 4 presents group financing from a taxation point-of-view. Debt financing may provide tax benefits in cross-border situations. Interest payments are usually deductible expenses, whereas dividend paid to a foreign parent company may usually not be deducted out of company profits. The differential tax treatment of debt and equity may imply tax-planning opportunities for group financing. Groups of companies may strive to allocate group financing companies into low-tax jurisdictions where the general tax rate is low, and extend intercompany loans into high-tax jurisdictions where the benefit of a tax deduction is high. Equity investments also provide tax-planning opportunities. The international tax treaty network and the Parent-Subsidiary Directive eliminate taxation at source from intra-group dividends as well.

Chapter 5 examines the concept of an associated enterprise. The concept of an associated enterprise is defined differently in the OECD Model Tax Convention and the Interest and Royalties Directive. International accounting standards and domestic accounting and tax laws also define the concept using their own criteria. A company belonging to a group of companies may, in practice, be an associated company under accounting laws but fall outside the scope of the Interest and Royalties Directive.

Chapters 6-9 deal with the concept of interest, taxation principles, interest deductions and transfer pricing issues dealing with interest and financing. Interest is commonly considered to be return on debt capital. The concept of interest has not been defined in the Finnish Income Tax Act or Business Income Tax Act. The Act on Taxation of Income of a Person Subject to Limited Tax Liability contains a definition of interest which is applied between associated companies located in different EU member states. Interest, according to the Act, means any income from debt-claims whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits.

The legal concept of interest is generally equal to the economic concept of interest. Return on zero-coupon bonds and perpetual loans are considered to be interest. The amount of interest is determined by percentage of interest, time and debt. Debt is characterized by the debtor-creditor relationship and the absence of participation rights. Finnish tax law does not explicitly rule how to draw a line between debt and equity. The classification of hybrid instruments under civil law is generally a starting-point. The classification is also based on case law. The economic substance of an instrument can be considered. There are no published cases where hybrid equity would have been reclassified as debt for tax purposes. Debt has been reclassified as equity only in a few cases.

According to the Commentary to the OECD Model Tax Convention, interest generally means remuneration on money lent, being remuneration coming within the category of “income form movable capital”. Article 11 OECD states that interest means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits and income from government securities and income from bonds or debentures, in particular.

There is an interconnection between interest and dividends in the Articles of the OECD Model Tax Convention. Interest on participating bonds should normally not be considered as a dividend; also, interest on convertible bonds should not be considered as a dividend before the bonds are actually converted as shares. It may be difficult to make a distinction between interest and dividend in situations of thin capitalisation. If the repayment of loan largely depends on the success of an enterprise, interest paid on such loans may be taxed as a dividend. The Contracting States may widen Article 11 OECD as to include any income which is taxed as interest under their domestic laws.

The OECD Transfer Pricing Guidelines require that the arm’s principle shall be followed in group financing. The arm’s length principle requires that associated enterprises shall apply market based interest rate and other financing terms to their internal debts and receivables. The OECD Transfer Pricing Guidelines do not, however, indicate how an arm’s length interest rate should be determined. The comparable uncontrolled price method is usually the preferred method for determining an arm’s length interest rate. It can be challenging to find loan agreements which would be sufficiently close comparables as to type, quality and quantity with an intercompany loan. The cost plus method has also been suggested as a suitable method for evaluating a current interest rate. With regard to comparables, an internal uncontrolled comparable would be preferred. External comparables will nevertheless be used in many cases. Group interest rates can be compared with market interest rates or a simulated credit rating can be carried out.

Chapter 10 concludes the thesis and discusses future scenarios on interest deductions in Finland. Finland does not have statutory thin capitalisation rules. The Finnish approach is liberal toward thin capitalisation. The tax authorities evaluate a company’s financing structure as a whole. Attention will be paid to the company’s debt to equity ratio and whether interest is paid in accordance with the terms of the loan agreement. Debt push-down structures have been widely used. Highly-leveraged financing structures have been subject to tax audits. It is fairly common to declare that debt to equity ratio 15:1 is accepted in Finland. This debt to equity ratio was accepted by the Supreme Administrative Court in KHO 1999:19. A clear rule should not be drawn only from one judgment. Published case-law of the Supreme Administrative Court dealing with thin capitalisation is limited. Many of the cases have been decided on the basis of a double taxation treaty. A qualified non-discrimination article following Article 24 (4) of OECD Model Tax Convention has prevented a denial of deductibility of interest.

The EC Treaty Freedoms also require equal treatment of domestic and cross-border situations. Landmark cases dealing with thin capitalisation are cases C-324/00 Lankhorst-Hohorst, C-524/04 Thin Cap Group Litigation and C-105/07 N.V. Lammers. The ECJ has found that the discriminatory application of thin capitalisation provisions involving a fixed debt to equity ratio constitutes a disproportionate restriction of the freedom of establishment. Domestic anti-abuse measures which categorically prevent taxpayers from exercising their right to free movement are not allowed unless domestic legislation has a “specific purpose of preventing wholly artificial arrangements”.

Interest deductions in Finland de lege ferenda The Finnish Ministry of Finance published a study in April 2009 dealing with interest deductions in corporate income taxation. The study covers the current legal status in Finland, development in various European countries and the impact of European Community law and double taxation treaties on interest deductions. The aim is to discover whether deductibility of interest payments should be limited in Finland and, if so, what kind of measures should be taken. Organisations representing Finnish industry and Trade, the Tax Administration, the Finnish Bank and tax law professors were requested to answer whether limitations on interest deductions should be introduced in Finland and, if so, what the limitations should be. The deadline was in June 2009. Due to the economic recession, it is likely that restrictions on interest deductions, if they are considered necessary, will not be introduced in the near future.

The Finnish corporate tax system should be reviewed as a whole before deciding whether limitations on interest deductions should be introduced. The liberal approach toward interest deductions and thin capitalisation provide companies with a competitive advantage. If the companies’ right to make interest deductions is limited, it should also be considered whether the general corporate tax rate of 26% should be lowered. The future of the Finnish group contribution system, where a profit-making group company may transfer taxable profit to a loss-making group company, should be reviewed in the same context. The Ministry of Finance has already indicated that Finland may transfer to a fiscal consolidation system.

Taking into account the current economic situation, there is a risk that tighter interest deduction rules may create unnecessary obstacles for corporate financing. On the other hand, the protection of the Finnish corporate tax base may call for limitations on interest deductions. Statutory interest deduction rules would provide legal certainty for both the taxpayer and the tax administration. The U.S. interest-stripping rules, the German Zinsschranke and Swedish limitations on related parties’ interest deductions serve as examples for possible limitations on interest deductions. In addition, the Belgian notional interest deduction and the Dutch initiatives on defiscalisation of interest income and deductions in group taxation and a mandatory interest-box should also be considered as well. Introducing a tax incentive would stimulate investments, whereas limitations on interest deductions would probably diminish Finland’s attractiveness from an investor point-of-view.

Mitkä ovat kansainvälisten konsernien verosuunnittelumahdollisuudet sisäisissä siirroissa?

Kansainvälisen konsernin verotuksen tasoon voidaan vaikuttaa valitsemalla sisäisiin siirtoihin lievästi verotettava tulotyyppi. Verosopimusten mukaiset korkotulon nollaverokannat voivat alentaa konsernin efektiivistä veroastetta. Verosuunnittelu voi johtaa tilanteeseen, jossa käytetyn tulotyypin muoto ei vastaa tulon taloudellista luonnetta. Sekamuotoisen hybridi-instrumentin tuotto saatetaan luonnehtia verotuksessa uudelleen koron sijasta osingoksi.

Teoksessa perehdytään koron vähennysoikeuteen elinkeinoverotuksessa. Verosopimusoikeus ja eurooppaoikeus edellyttävät, että rajat ylittävien korkojen on pääsääntöisesti oltava samoin edellytyksin vähennyskelpoisia kuin kotimaisten korkojen. Kirjassa käsitellään myös rajanvetoa koron ja luovutusvoiton, liiketulon, muun tulon sekä rojaltin tulotyyppien välillä. Lähiyhtiön käsitettä tarkastellaan moniulotteisesti vero-oikeuden, kirjanpidon ja yhtiöoikeuden näkökulmasta.

Viime vuosina useat valtiot ovat siirtyneet alikapitalisointisäännöksistä korkovähennysrajoituksiin. Kirja ottaa kantaa koron vähennysoikeuden rajoittamiseen Suomen elinkeinoverotuksessa. Etujärjestöt ja julkishallinto ovat antaneet valtiovarainministeriölle lausuntoja, joissa on sekä vastustettu että puollettu koron vähennysoikeuden rajoittamista. Lisäksi tarkastellaan markkinaehtoisen koron määrittämistä siirtohinnoittelussa.

Denna avhandling gäller beskattning av interna räntebetalningar mellan närstående bolag belägna i olika stater. Avhandlingen är en rättsdogmatisk studie med komparativt inslag från USA, Tyskland, Estland och Finland. Även Sverige har behandlats relativt ingående. Andra länder har behandlats i anslutning till särskilda rättsfrågor. Rättsfall från cirka 10 länder har behandlats. Avhandlingen redogör för skillnaden mellan hard law och soft law. Flera metoder, såsom skattepolitik och planering, har tillämpats vid sidan av den rättsdogmatiska och komparativa metoden. Avhandlingen har lånat inslag från andra vetenskapsområden, som t.ex. bokföringen, IFRS, bolagsrätten, finansieringen, nationalekonomin och historia forskningen. Se Kristiina Äimä: Sisäiset korot lähiyhtiöiden kansainvälisessä verotuksessa. WSOY. Helsingfors 2009. Avhandlingen innehåller en engelsk resumé om 17 sidor.

Temat behandlas ur ett internationellt skatterättsligt perspektiv. Begreppet närstående bolag är centralt för temat. Närstående bolag definieras på ett annorlunda sätt inom bokföring, bolagsrätt och skatterätt. Likaså är definitionerna av ränta olika i skatterätten och andra vetenskaper. Räntebegreppet undersöks ur skatteavtalsrättens, EG-skatterättens och nationella rättens perspektiv.Särskild vikt läggs vid avdragsrätten för räntebetalningar och fastställandet av en marknadsmässig ränta.

Inom multinationella företagsgrupper förekommer det lån och förskott på betalningar på samma sätt som mellan oberoende bolag. Ett skuldförhållande kan utgöras av en kortfristig skuld, såsom kundfordring eller leverantörsskuld.

Därtill kan kapital lånas ut långfristigt i kapitalplaceringssyfte. Likaså kan kapital lånas ut för att ställa arbetande kapital till ett närstående bolags förfogande. Beviljandet av ett närståendelån kan vara i strid med aktieägarnas likställighetsprincip. Detta har beaktats i bolagsrätten. I verksamhetsberättelsen till bokslutet skall separat uppges penninglån, säkerheter och ansvarsförbindelser till personer som står bolaget nära samt de huvudsakliga villkoren för dessa. Avhandlingen tangerar finansieringen av multinationella företagsgrupper ur beskattningens synvinkel. Det påstås allmänt att företagsfinansieringen påverkas av det faktum att investeringar som har finansierats med främmande kapital beskattas i de flesta stater lindigare än kapitalplaceringar. Enligt huvudregeln får en investerare göra avdrag för räntebetalningar medan utdelningar på kapitalplaceringar vanligtvis inte är avdragsgilla i beskattningen.

De belgiska reglerna gällande fiktivt ränteavdrag på eget kapital avviker däremot från huvudregeln. OECD-medlemsländernas dubbelskattningsavtal och nationella lagstiftning befriar vanligtvis ränteinkomster från beskattning i betalarens källstat. Källskattefriheten leder till skatteeffektiva kapitalöverföringar inom multinationella företagsgrupper. Internationell skatteplanering drar nytta även av ränteavdragen.

Skatteeffektiviteten kan vara icke önskvärd från en statsfiskal synpunkt. Inom EU finns det ytterligare reglering gällande interna räntebetalningar. Enligt EG:s ränte- och royaltydirektiv beskattas interna räntebetalningarna endast i mottagarens hemviststat. För övrigt har EG-domstolen tolkat EU:s grundfriheter i sin rättspraxis så att en medlemsstat skall bevilja avdragsrätten under samma förutsättningar i gränsöverskridande situationer som i inhemska situationer. En nationell bestämmelse som inskränker etableringsfriheten kan ändå vara motiverad när den särskilt avser fiktiva upplägg som iscensätts för att kringgå lagstiftningen.

Kravet på lika skattebehandling har lett till att många medlemsstater har övergått från traditionell underkapitaliseringsreglering till ränteavdragsbegränsningar. De nya avdragsbegränsningarna kan vara bundna till en procentenhet av EBIT (eng. Earnings before Interest and Taxes) eller motsvarande siffra eller låntagarens nominella finansiering av affärsförmögenhet.

Ett koncernbolag som hör till en europeisk företagsgrupp beskattas som om bolaget vore fristående. Detta förorsakar mångfaldig beskattning. Europeiska kommissionens initiativ att harmonisera koncernbeskattningen skulle eliminera förlustutjämnings-, underkapitaliserings- och interprissättningsproblemen inom europeiska företagsgrupper.

Den senaste utvecklingen i Sverige har följts noggrant i Finland. Bland annat förekomsten av räntesnurror i företagsskatteplaneringen och Regeringsrättens dom i Industrivärlden-målet har diskuterats. Dessutom har de nya svenska ränteavdragsbegränsningarna som skall förhindra skatteplanering inom företagsgrupper väckt intresse. För tillfället utreder finansministeriet om avdragsrätten för räntebetalningar borde begränsas inom finsk näringsbeskattning.

Ifall avdragsrätten begränsas används sannolikt de svenska begränsningarna som förebild för den finska nya regleringen. Avhandlingen behandlar fördelar och nackdelar som kunde uppkomma om begränsningar introducerades.