On 4 November 2021, the government of Finland has published a proposal to the interest deduction limitation rules. The proposed amendments are particularly relevant for companies that rely on the “balance sheet test” which provides for an exception to the restriction rules, as well as for companies those holding public infrastructure assets or those that were taxed under the Income Tax Act prior to 2020. If adopted, the new rules would come into force on 1 January 2022.

Under current legislation, the interest limitation rules do not apply to a company that is a member of a group if the company’s equity-to-asset ratio is equal to or greater than the group’s equity ratio; this comparison is known as the “balance sheet test”. The comparison is made on the basis of the established financial statements, which may be converted to the same accounting principles.

The proposal would change the rules for the balance sheet test so that debts are reclassified to the consolidated financial statements for balance sheet test purposes under certain conditions. As a result of such a reclassification, the Group’s equity ratio would increase, which would make it more difficult to rely on the exception. A reclassification would take place if the debt was issued by a party who (directly or indirectly through a related party) holds at least 10% of the shares, voting rights or profit rights of a group company. 

The proposal also includes a requirement that the financial statements used in the balance sheet test would have to be subject to statutory audit. The audit requirement would apply to the balance sheets that are the basis for the comparison, but not to the converted balance sheets that may be required in order that the assets and liabilities of the entity and the group are valued under the same accounting principles.

The amendments would apply as from tax year 2022.