Taxation of Corporate Reorganisations Becomes More Flexible – Government Proposes Update to Tax Provisions
The article has also been published in Almatalent Juridiikan ajankohtaiset (in Finnish).
A merger of sister companies without consideration, a higher maximum cash consideration, and new opportunities to deduct the losses of a merged company within a group – the Government is proposing significant changes to the tax treatment of corporate reorganisations. The aim is to streamline reorganisations and reduce the administrative burden on taxpayers, and the new provisions are intended to enter into force as early as 1 January 2027. What do the changes mean in practice for companies planning structural arrangements?
Background to the Proposal
The Government proposal concerns the Business Income Tax Act, the Income Tax Act and the Act on the Valuation of Assets for Tax Purposes, and includes an exceptionally broad set of changes to the tax treatment of corporate reorganisations. This is therefore not an isolated clarification but an update of the entire body of rules. The changes mainly concern tax-neutral corporate reorganisations, that is, arrangements whose implementation does not give rise to immediate income tax consequences.
The aim of the changes is to update and make the rules more flexible, to streamline tax processes, and to reduce the administrative burden on taxpayers and the Finnish Tax Administration. In addition, the wording of the Business Income Tax Act would be aligned with case law, under which the corporate reorganisation provisions also apply to companies located in the European Economic Area.
At the same time, a simplification of the rules on the Merger Directive is also pending at EU level, as part of the European Commission's so-called Tax Omnibus initiative. The national reform is therefore not taking place in a vacuum, even though its progress does not depend on the outcome of the EU rules.
Merger of Sister Companies Without Consideration to Be Expanded
Under the current wording of the Business Income Tax Act, a tax-neutral merger without consideration is possible only in a direct parent–subsidiary or sister-company merger, although case law has also accepted mergers without consideration in situations involving indirect ownership, provided that the ownership structure and its continuity are preserved. The proposal suggests that a tax-neutral merger without consideration should also be made possible where the merging company transfers its assets and liabilities without consideration to a limited liability company that is indirectly wholly owned by the shareholder of the merging company through a limited liability company it wholly owns. The change would codify at the level of statute an interpretation already accepted in case law.
New Form of Demerger and Increase in the Maximum Amount of Cash Consideration
The Limited Liability Companies Act already recognises a demerger carried out by incorporation, but because the Business Income Tax Act contains no provisions on it, the arrangement has in principle been regarded as taxable. The proposal suggests adding it to the Business Income Tax Act as a new form of demerger, to which the general tax principles applicable to demergers would apply.
An exception is also proposed for demergers of housing companies and mutual real estate companies, under which consideration shares could be allocated in a way that preserves existing share ownership and the rights of possession to apartments more flexibly than at present.
In addition, it is proposed that the maximum amount of cash consideration in a merger or demerger be raised from the current 10 per cent to 50 per cent of the value of the consideration shares, which would match the limit already applicable to share exchanges. The change would ease, for example, situations where minority shareholders do not wish to remain shareholders of the receiving company, without jeopardising the tax neutrality of the arrangement.
Negative Net Contribution in Kind Within a Group and Deduction of Losses
The proposal suggests that a tax-neutral transfer of business operations should also be made possible in situations where the tax values of the business entity being transferred are, on a net basis, negative. The acquisition cost of the consideration shares would then be a negative value, which would be recognised as income only upon a later transfer of the shares. The change is expected to particularly ease structural arrangements for growth companies.
In addition, it is proposed to amend the provision on the deduction of losses so that the receiving entity may deduct the losses of the merged or demerged entity also where the entities have belonged to the same group from the beginning of the loss year, even if the current ownership requirement (more than 50 per cent) is not met. This question generated the most discussion in the consultation round, because the model originally proposed, which would have abandoned the ownership-based test altogether, was considered open to interpretation. For this reason, the ownership requirement under the current legislation was decided to be retained in the proposal, and the group-basis test was added alongside it as an alternative condition.
Other Clarifications
The proposal also suggests that the scope of application of the corporate reorganisation provisions be codified to correspond to established case law, so that the provisions would in future apply explicitly also to arrangements between companies located in the European Economic Area, not only in EU member states. In addition, the calculation of the mathematical value of a share would be clarified so that it is always recalculated for the year of implementation in connection with a merger or demerger, and funds invested through share issues would be taken into account only from the tax year in which the new shares are registered in the Trade Register. The aim is to improve the predictability and consistency of dividend taxation.
What Companies Should Do Now
Although the changes are not intended to enter into force until 1 January 2027, and will be applied for the first time in taxation carried out for the 2027 tax year, their effects should already be taken into account now when planning future mergers, demergers and business transfers, particularly in situations where the current rules have so far prevented the use of an arrangement without consideration or otherwise flexible means of implementation.
It should also be noted that the proposal is still before Parliament, so the details may still be refined or changed during committee review. During the preparation of the legislative project, the provision on the deduction of losses, as well as the maximum amount of cash consideration in mergers and demergers, among other things, were significantly amended from the original proposal during the consultation round.
