Insight 01/2023: The Supreme Administrative Court’s decision on taxation of the hybrid arrangements in private equity structures

The Supreme Administrative Court gave an important decision on taxation of the hybrid arrangements in private equity structures (SAC 2023:31).

In the case, a Finnish private equity fund (LP) owned 66.9% of a Finnish holding company. The decision concerned the deductibility of interest expenses on the debt granted by the private equity fund to the holding company. The hybrid rules did not restrict the deductibility of the interest expenses in taxation of the holding company when the limited partners of the private equity fund and the holding company were not affiliated for the purposes of the hybrid rules. The fact that the private equity fund and holding company were affiliated was not relevant, but it was relevant that the holding company and limited partners of the private equity fund were not affiliated, because the difference in tax treatment was created between the taxation of the holding company and the foreign limited partners of the private equity fund. The difference was due to the fact that the interest income was not taxed as income of some of the foreign limited partners, but it was deemed as income of the private equity fund.

The hybrid rules concern expenses, the tax treatment of which is not consistent in cross-border situations, because a hybrid arrangement exists in which a financial instrument or related payment, the payor or payee are treated inconsistently in taxation in different jurisdictions. The decision of the Supreme Administrative Court clarifies the hybrid rules e.g. in private equity structures.

For more information, please contact Sebastian Kellas and Antti Leppänen.