Legal Alerts/30 Dec 2024
Green Investment Opportunities: Finland’s New Tax Credit for Large Industrial Projects
The Finnish Government has finally introduced its new proposal (HE 207/2024) aimed at fostering large-scale industrial investments that support the transition to a climate-neutral economy. This initiative, which is part of the Government’s broader economic growth package, seeks to attract significant investments by offering an investment credit targeted at large green industrial projects. As we have discussed in our previous Legal Alert, there were initially many pending clarifications e.g. regarding the eligibility criteria, and the draft proposal received a considerable amount of feedback during the legislative process. Many of these topics have been further addressed in the proposal.
As relevant background, approximately EUR 280 billion worth of green transition investment projects are currently underway in Finland according to the Data Dashboard maintained by the Confederation of Finnish Industries. Of these, approximately EUR 14 billion are in production, whereas the majority of the projects are still in the early planning stages. For the sake of clarity, it should be noted that a significant amount (approx. EUR 180 billion) of the listed investment pipeline is onshore and offshore wind power projects, which will not be eligible for the investment credit. Instead, the proposal will focus with a more precise scope on projects which will create demand for new renewable power build-out and thus indirectly also benefit the renewable power projects.
The investment credit is made possible through the European Commission's Temporary Crisis and Transition Framework (TCTF), which defines the eligible types of investments and establishes limits on when this kind of State aid can be granted. The introduction of the investment credit is justified in an international comparison as the majority of other EU countries have also developed similar support programmes for clean transition investments.
For clarity, it should be noted that the Ministry of Economic Affairs and Employment is currently preparing a separate support programme for industrial investments in the clean transition, in the form of direct government grants. This support programme is distinct from the Government proposal on the investment credit, which is the subject of this Legal Alert.
The key features of the proposal
Overall, the investment credit is designed to reduce the financial burden on companies undertaking large-scale, climate-friendly projects. The investment credit will target large industrial investments with a minimum threshold set at EUR 50 million (calculated separately for each investment). The proposed credit would cover up to 20% of the investment costs, capped at EUR 150 million (calculated on a consolidated basis for groups of companies).
Eligible projects for the investment credit include:
- production of renewable energy (such as renewable hydrogen and renewable hydrogen fuels); storage of electricity and heat; storage of renewable hydrogen, biofuels, bioliquids, biogases, biomethane and biomass fuels;
- decarbonisation of industrial production processes and energy efficiency measures; and
- investments in the production of equipment, key components and related critical raw materials essential to the transition to a climate-neutral economy.
The Ministerial Committee on Economic Policy has decided that renewable electricity production is excluded from the investment credit. This is because, currently, the aim is to provide targeted support to projects whose implementation would be uncertain without the credit and the production of renewable electricity has already advanced rapidly also through commercial means in Finland.
The investment credit is intended for new investments decided upon by the end of 2025. Business Finland will manage the approval and monitoring process, whereas the role of the Finnish Tax Administration should mainly be focused on the technical implementation.
The companies entitled to the investment credit could start deducting the credit from their corporate income tax from 2028 onwards. However, the investment credit can be deducted no earlier than in the tax year in which the investment is completed. Furthermore, in each tax year, the deduction for the investment credit can be a maximum of 10% of the total amount of investment credit granted to the company.
Key observations
- Application for the investment credit: The official decision to grant the investment credit must be made by the end of 2025. It should be noted that the TCTF does not require for a final investment decision to have already been made as a condition for approving the application, meaning that the investment credit application could be submitted during the early planning stages as well. It is unclear how much practical relevance this will have as the application must still include detailed information about the planned project for Business Finland to grant the investment credit based on estimated costs.
- New projects only: The investment credit should be applied before the commencement of work related to the investment, meaning that only new investment projects would be eligible for the credit. This is justified by the fact that the support should have an incentivising effect, so funding should not be granted for projects that have already begun.
The commencement of work refers to the start of construction activities related to the investment or to the first legally binding equipment order commitment or any other such commitment that makes the investment irreversible, whichever occurs first. For pragmatic purposes, the legislation also enables certain actions to have been made before submitting the application. For such investments, it is required that a contractual clause has been included stipulating that the investment will be cancelled if the investment credit application is not approved.
Purchase of land and preparatory tasks, such as obtaining permits and conducting preliminary feasibility studies, would not be considered as the commencement of work. However, it should be noted that earthworks (e.g. land levelling and piling) may be considered the commencement of construction activities.
- Eligible expenses: Wages and overhead costs are not eligible expenses for the investment credit. It could be argued that excluding these costs places companies that have developed their own in-house expertise for managing investment projects at a disadvantage, while favouring those that do not employ internal staff for their investment projects. Thus, the proposal encourages the use of external service providers as costs incurred from outsourced work qualify for the credit.
- Investment threshold: The minimum investment threshold must be at least EUR 50 million. This threshold will be assessed on a project-by-project basis, considering investments made in a single geographical location and in one production facility.
The decision to asymmetrically exclude group-level investments from consideration for investments meeting the minimum threshold (as is done for the upper limit) could be seen inconsistent. Furthermore, it is unfortunate that the minimum threshold has been set exceptionally high on an international scale.
- Taking advantage of the investment credit: It is important to note that the investment credit is not strictly tied to the profit generated by a specific project. Instead, it can be applied against the company’s other taxable income as well. Furthermore, the investment credit can be utilised through the Finnish group contribution system as corporate income tax arising from group contributions is not excluded from the credit either. This significantly expands the opportunities for the usage of the investment credit within a group of companies.
- Global minimum tax: The investment credit may result in a liability to pay a top-up tax in Finland, and it may introduce some administrative challenges as well. While these challenges exist, it should also be noted that applying the investment credit requires an annual claim by the taxpayer. Therefore, the legislative proposal allows the taxpayer flexibility and discretion in deciding whether it is beneficial to claim the deduction of the credit.
Next steps
The proposal is contingent on a final approval from the European Commission, ensuring it aligns with EU State aid rules. Pre-approval for the proposal has already been granted, however, amendments to the final legislation are still possible. Once the final approval is granted, the legislation will be enacted through a government decree and Business Finland aims to open the investment credit application process as soon as possible.
At this stage, it is advisable to begin identifying projects that may qualify for the investment credit. It is important to note that no work related to the project can begin yet, but it would be crucial to start preparing calculations and estimates for the application well in advance to ensure that the application can be processed smoothly by the end of 2025. With many other applications expected, delays may occur, making it even more important to submit early.
Since the investment credit is a new type of tax incentive, many new situations open to interpretation are expected to arise. As a positive amendment, the updated version of the proposed legislation no longer includes strict wording relating to the treatment of the investment credit regarding corporate restructurings. Another matter to consider well in advance is whether a company meets the legal requirements for the Finnish group contribution. Therefore, since the credit offers a significant tax advantage, precaution with advance planning and structuring is essential.
Furthermore, the need for meticulous planning is emphasised by the fact that the proposed legislation includes a relatively strict deadline: the facility in question must be completed and operational within 36 months from the date on which the credit is granted by Business Finland. This means that the clock starts ticking as soon as the positive decision for the credit is made, so companies should be prepared to commence work without delay.
Given that the application process demands careful preparation, our experts are ready to assist you with guidance and support throughout the process.
