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In General
Several amendments to the Finnish Asset Transfer Tax Act, which have significant effects on foreign real estate investors, are scheduled to enter into force on January 1st, 2013.
According to the Government Bill (HE 125/2012 vp), the contemplated changes are primarily fiscal and have been estimated to increase revenues collected by transfer tax by 80 million euros. Changes are targeted at tackling the discrepancy in tax burden between directly and indirectly owned real estates and at minimizing tax avoidance based on tax planning.
Furthermore, the amendments are directed at unifying the tax treatment of so called housing company loans (loans that a housing company recoups from shareholders) and payments to construction funds frequently made by buyers when acquiring securities. It has been criticized that buyers have unequal tax standing where the transfer tax depends on the method of construction of the real estate having been financed.
A transfer tax rate raise from 1.6 % to 2.0 % shall be applied to most of transfers of securities relating to real estate; i.e., transactions involving residential housing companies and corresponding cooperative societies, mutual real estate companies, and other companies for which main part of business consists in the direct or indirect owning or controlling of real estate and real estate holding companies located in Finland.
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Transfer tax base expansion
New provisions addressing the above mentioned issues shall be added to the Asset Transfer Tax Act. The provisions capture all liabilities a shareholder is obligated to carry out (or has right to carry out) to the housing company according to articles of association, resolutions of general or board meeting of housing company, as well as payments to construction funds and third parties that are based on deed of transfer. The same applies to loans withdrawn by housing companies during the construction period even if a resolution regarding each shareholder´s obligation to carry out such liabilities to housing company was not made at time of the transfer.
When calculating payable transfer tax, debts burdening securities of a housing company shall be added to the purchase price, without regard to whether such debts were paid at the time of acquisition. This is a novel piece of legislation and addition to the legal praxis in Finland. Earlier Supreme Administrative Court precedents narrowed the transfer tax base by stipulating that outstanding shares of a housing company loan were not to be accounted for in the tax base as such loan was seen as having no relation between a buyer and a vendor.
This all means that the transfer tax shall be paid on the sale price, free of debt, as opposed to the purchase price minus the debts. It is worth noting that a consideration is accounted for transfer tax purposes regardless whether it is paid directly to the vendor or paid in the vendor´s indirect interest. Examples indicating such interest have been identified as repayment of debts owed by a target company to the shareholder, payment for receivables that the shareholder is entitled to from a target company, or payment to an affiliate company of the vendor. Varieties of different payment methods also comprise indirect interest when builder-developers hands over a newly built or newly renovated building where the buyer assumes liabilities regarding construction funds, as based on the deed of transfer.
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Transfer tax on foreign securities
Tax planning involving structures using foreign holding companies has been widely used in Finland. Structures have been used not only by foreign but also by Finnish real estate investors. Presently transfer tax has not been levied on the transfer of real estate situated abroad or securities issued by a foreign holding company.
Pursuant to proposed amendments, transfer tax shall be levied on transactions of foreign securities in certain cases. Preconditions are that business of such foreign holding company factually includes the direct or indirect ownership or control of immovable property and that more than 50 % of the company's assets are composed of directly or indirectly owned real estates located in Finland. The transaction of securities of foreign holding company shall be treated like domestic transactions, and transfer tax shall be imposed provided that one of the parties of transaction is a resident of Finland or a branch of a foreign credit institution or investment service company situated in Finland.
The tax treatment is basically similar both with respect to residents and non-residents. The new amendment enable Finnish transfer tax to be levied on transfer of securities issued by a foreign corporate body and ends an era in which foreign holding structures could be used for tax planning purposes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.