Tax-Deductibility of Write-Downs confirmed in Corporate Restructurings

Borenius assisted the creditors in an advance ruling process in which the Central Tax Board (“CTB”) recently issued three advance rulings (28/2021, 29/2021 and 30/2021) on the tax-deductibility of write-downs suffered by the creditors in a corporate restructuring (yrityssaneeraus in Finnish). Two of these rulings will be published by the CTB in the near future.

The creditors had invested in loan notes issued by a private Finnish company. The company faced financial difficulties and applied for a corporate restructuring. According to the restructuring programme the applicants’ receivables were subject to a 30% haircut. The restructuring programme was approved by the District Court in 2020.

The advance rulings confirmed that the write-downs under the restructuring programme were tax deductible for corporations under the Business Income Tax Act and for individuals under the Income Tax Act (“ITA”). The most significant aspects of the advance rulings relate to the timing of the tax deduction and the definition of security under the ITA, which will be discussed below.

Firstly, the CTB confirmed in its advance rulings that a write-down is tax-deductible upon the confirmation of the restructuring programme. Furthermore, the CTB confirmed that the potential right to additional payments (lisäsuoritusvelvollisuus in Finnish) under the restructuring programme does not postpone the tax-deductibility of the write-down, but the amount of the tax-deductible loss is based on the write-down determined under the restructuring programme.

Secondly, the CTB addressed the definition of securities. This is relevant specifically for individuals, for whom a final loss of a security is deemed to constitute a tax-deductible capital loss.

The Supreme Administrative Court has previously confirmed in its decision SAC 2018:11 that at least order bonds (juokseva velkakirja in Finnish) are considered as securities. The loan notes addressed in the advance ruling were named ordinary promissory notes (tavallinen velkakirja in Finnish), but they had characteristics similar to the order bonds. The loan notes were transferable, and the debtor did not know the investors’ identity before the corporate restructuring started.

The CTB ruled that the loan notes in question are deemed securities regardless of the fact that they were named ordinary promissory notes, because the notes were (i) freely transferable; and (ii) the debtor did not know the investors’ identity.

Therefore, the write-down of the receivable that was based on the loan note was deemed a tax-deductible capital loss.

These rulings provide much needed clarity to the tax treatment of creditors in connection with corporate restructurings. It should be noted that the rulings are subject to appeal to the Supreme Administrative Court during 30 days.

If you have any questions regarding the matter, please feel free to contact any of Borenius’ attorneys listed in this alert or those with whom you usually work.