Tax reform stops Caruna’s profit shifting, adds millions to state revenue

By admin On Feb 18, 2025

Electric power distibution network operator Caruna. Photo: Santeri Viinamäki

A legislative change aimed at tackling tax avoidance has proven effective, according to a new report published by Finnwatch. The reform, introduced two years ago, closed a loophole in Finland’s corporate tax law that previously allowed electricity distributor Caruna to shift significant profits abroad. As a result, Finland gained an additional €9 million in tax revenue from Caruna alone in 2023.

Saara Hietanen, a tax expert at Finnwatch, said the findings demonstrate the impact of political action on tax avoidance.

“Tax avoidance can be effectively curbed through legislative changes, provided there is political will to act,” Hietanen said.

The reform, which took effect in early 2023, tightened the conditions for the so-called balance sheet exemption. This exemption allowed certain companies to bypass interest deduction limitations designed to prevent profit shifting. By exploiting this rule, companies could deduct unlimited interest expenses from their taxable income, significantly reducing the amount of corporate tax paid in Finland.

Over the years, companies using the exemption have gained substantial financial benefits. Finnwatch estimates that Caruna alone saved over €100 million in taxes between 2015 and 2022 through aggressive tax planning.

“The cost of the balance sheet exemption to the state has been enormous,” Hietanen said.

The 2023 law change put an end to Caruna’s tax avoidance strategy. The company’s corporate tax payments in Finland doubled from €13 million in 2022 to €26 million in 2023. The majority of this increase—€9 million—was due to the new restrictions preventing Caruna from deducting all interest expenses paid to its owners.

The reform did not have the same impact on Elenia, another electricity distributor examined in the report. Unlike Caruna, Elenia had not used the balance sheet exemption for tax planning. Instead, it has been able to deduct all its interest expenses through other tax provisions.

Finnwatch warns that significant loopholes still exist in Finland’s tax system. High deduction thresholds and generous transitional provisions continue to enable profit shifting.

Despite the government’s focus on budget savings, little has been done to address these tax gaps. Finnwatch calls for action in the upcoming government budget session, particularly on share swap arrangements, which have re-emerged in public debate in recent days.

“Despite strict savings targets, the government has largely ignored tax loopholes. This needs to change in the budget talks,” Hietanen said.

Source: www.helsinkitimes.fi