Supreme Administrative Court Clarified the Scope of Interest Deduction Limitations and the Interpretative Effect of ATAD

A recent ruling from the Supreme Administrative Court (“SAC”) KHO:2024:58 addressed the scope of the Finnish interest deduction limitations. According to the SAC, an arrangement fee paid to the arrangers of a senior secured bond was not deemed as interest for the purposes of the Finnish interest limitation rules and was thus tax deductible regardless of the interest limitations. The ruling also has wider significance in respect of the scope of the interest limitation rules and the interpretative effect of the Anti Tax Avoidance Directive (the “ATAD”). Borenius acted as legal counsel to the issuer of the bond.

In the case at hand, the company issued a bond using two arrangers and bookrunners for the issuance. The arrangers coordinated the issuance of the bond, including the coordination of the commercial terms of the loan. Under the mandate agreement signed between the company and the arrangers, the services provided by the arrangers included e.g. acting as a broker for the issuance, coordination and assistance in dealings with credit rating agencies, and coordination and assistance in listing the debt securities on a stock exchange. For these services, the company paid the arrangers a fee determined as a percentage of the nominal value of the bond.

The company requested an advance ruling from the Finnish Tax Administration to confirm whether the arrangement fee is considered as interest when applying the Finnish interest limitation rules or if it can be deducted without the limitations. Both the Tax Administration and the Helsinki Administrative Court ruled that, from the company's perspective, the services were closely related to the acquisition of financing and thus, the ATAD required for the fee paid for such an arrangement to be regarded as an expense subject to the interest deduction limitations.

The SAC came to a different conclusion and held that the expenses could be deducted without the impact of the interest deduction limitations.

Firstly, the SAC made a distinction between costs that are economically equivalent to interest and expenses incurred in connection with raising financing. While interest and economically equivalent costs are harmonised by the ATAD and thus generally include all the respective expenses outlined in the ATAD, the scope of the expenses incurred in connection with raising financing leaves more discretion to the Member States. Secondly, the SAC emphasised that the definition of interest is symmetrical and thus interest expenses that fall within the scope of the interest limitation rules correspondingly constitute interest income for the receiver.

Under Finnish law and its preparatory works, fees paid for advisory services used for raising financing are not deemed as expenses incurred in connection with financing for the purposes of interest limitation rules. Therefore, such expenses do not fall within the scope of the interest limitation rules.

Since the company had paid the arrangement fee for advisory services required by the issuance of the bond, the arrangement fee was not considered as interest for purposes of the interest limitation rules and could thus be deducted without the limitations.

The case sets a precedent that will reduce the tax risks associated with advisory service expenses incurred in connection with various debt arrangements. The mere fact that the amount of expenses is contingent on the finance arrangement succeeding or on the amount of financing itself does not render the expense an interest expense.

Based on the decision, the interpretative effect of the ATAD is also more limited in respect of expenses incurred in connection with raising financing compared to the one that applies to costs that are economically equivalent to interest.

Even now with the SAC’s ruling, there is room for interpretation regarding expenses incurred in connection with the raising of debt funding that cannot be considered to constitute advisory costs. These include, among others, a wide range of costs relating to e.g. bond listing, security agents, trustees, and credit ratings.

If you have any questions about the ruling, please contact the undersigned or your regular Borenius contact.