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Browsing by Author "Gärkman, Anton"

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  • Gärkman, Anton (2018)
    MNEs tend to allocate debt to group entities located in countries with high corporate income tax rates or that grant a broad right to deduct interest payments. So-called “debt push-down” structures represent one example of aggressive tax schemes carried out by MNEs. The aim of such schemes is to cover, wholly or partially, debt incurred for the purpose of a corporate acquisition by revenues generated by the acquired target company. This aim is often achieved through tax consolidation regimes. In line with global efforts to tackle tax avoidance and to protect the national tax bases, the courts and tax authorities of several countries have during the past decade started to view arrangements involving the use of debt push-down strategies as schemes implemented for the main purpose of avoiding paying taxes. A similar approach has recently been taken in Finland. On 19 May 2016, the Supreme Administrative Court of Finland issued two yearbook decisions in which the Court denied the interest expense deductions associated with the acquisition debt “pushed down” to the foreign group’s Finnish branch acting as a holding vehicle. The “branch rulings” had a significant impact on established case law which has generally accepted the use of highly leveraged holding companies, thus without interfering with the interest deductions. Given the fact that it’s not clear whether the outcome would have been the same if the branch had been replaced by a limited company, the rulings raise the issue of discrimination. One part of the problem concerns the comparability test. The question is whether a non-resident enterprise with a PE is comparable to a resident enterprise. If the answer is in the affirmative, the two groups of taxpayers must, pursuant to the prohibition of discrimination set out in international tax and EU law, generally be treated in the same manner. This implies that a PE is entitled to apply the same rules, the scopes of which are clarified in customary practice, as resident enterprises. Furthermore, the complexity of the rulings highlights their importance. One of the reasons for this is that the Court based its decisions on different provisions. In KHO 2016:71, the Court held that the ownership of the subsidiary shares didn’t belong to the Finnish branch by referring to the general rules of EVL. Consequently, neither could the financing debt associated with the shares be allocated to the branch. In its other decision KHO 2016:72, the Court (re)allocated the subsidiary shares (from the branch) to the group’s parent company through the application of the general anti-avoidance rule of VML Sec. 28. It follows from this that the interest deductions made by the branch were denied. Another reason for the complexity is that the content of a new concept introduced by the OECD that is used for allocating assets, risks and capital to PEs is ambiguous. Briefly, the concept, known as the SPF concept, assigns subsidiary shares to the part of the enterprise that performs the SPFs relevant to share ownership and/or management. However, it’s not entirely clear what kind of decision-making falls within the concept’s scope in the context of subsidiary shares. Some say that only decisions relating to the acquisition and alienation of the shares, including the financing of the acquisition, qualify as SPFs, whilst others assert that the threshold should be set lower to “normal” decision-making associated with the use of typical shareholder rights. Inspired by these two rulings, the study intends to analyse the conditions under which subsidiary shares and corresponding acquisition debt may be assigned to a branch of a foreign enterprise located in Finland. The answer to this question requires an assessment of the following main factors: the international and domestic legal framework for profit attribution to PEs, the use of the OECD’s guidance as a source of interpretation and the principles of legality and non-discrimination, as well as VML Secs. 28 and 31. The latter requires that transactions between the PE and other parts of the enterprise to which it belongs, or other associated enterprises, have been carried out at arm’s length conditions.