eThesis - School of Business electronic theses

This thesis examines the taxation of hybrid instruments and the impact of the new amendments adopted to the EU Parent-Subsidiary Directive in Finland. A Government Bill 59/2015 proposed the Directive amendments to be implemented to 6a§ of the Business Income Tax Act (EVL) to tackle hybrid mismatch arrangements and to prevent any misuse of the Directive.

Hybrid instruments are financial instruments that have both equity and debt characteristics, which makes the classification to either equity or debt difficult. Finnish legislation does not recognize hybrid instruments but the classification in practice follows the legal form of the instrument. Classification problems typically arise when a hybrid loan has equity characteristics but there has been no case law so far where a hybrid loan has been reclassified as equity for tax purposes. Hybrid mismatches are born in cross-border transactions e.g. when hybrid instrument is classified differently in different tax jurisdictions. These arrangements can lead to double non-taxation, i.e. to an outcome where the income generated by the instrument is not taxed anywhere.

Lately, EU and OECD have aimed to prevent aggressive tax planning and the amendments to the Parent-Subsidiary Directive are part of EU's larger plan to strengthen the fight against tax fraud and tax evasion. Amendments aim to refrain from granting the Directive benefits, i.e. tax exemption on direct investment dividends in the parent company's Member State, in situations where the same distribution is considered tax deductible in the Member State of the subsidiary. Furthermore, a general anti-abuse clause was adopted to prevent any misuse of the Directive and to ensure a greater consistency in its application in different Member States. It is applicable in situations where the arrangement is not seen "genuine" or if one of its main purposes is tax avoidance. Amendments to the Directive were implemented to Finnish Business Income Tax Act 6a§ by adding paragraphs 8 and 9, which are applied from tax year 2016 onwards.

Impacts to Finnish entities remain somewhat unclear regarding the new anti-abuse rule. Since hybrid instruments are in principle considered as debt, situations where a Finnish entity is a debtor in a hybrid arrangement seem more common than vice versa. Thus, the impact of the new legislation regarding new paragraph 8 is not likely very significant. However, companies' administrative burden will grow, as tax treatment of the dividend distribution in the source state needs to be figured out. The new regulation will also overrule any dividend exemptions in tax treaties, since it is argued that the purpose of the new regulation is to prevent double non-taxation whereas double tax treaties' purpose is to eliminate double taxation, not to enable it.