Group contributions are an effective way to transfer income between group companies

With the help of group contributions, companies and cooperatives have the opportunity to restructure the operating results of their group companies. With group contributions, companies can consolidate the taxable income of loss- and profit-making companies when companies are organized in a group structure. In principle, when using a group contribution, the loss of another group company can be taken into account in the taxation of the profitable group company. Alternatively, profits can be transferred quickly by way of group contribution to the ultimate parent company to enjoy a prompt dividend distribution to its shareholders after each financial period. As of 2020 it will possible to use group contributions in even more cases than before as the rules have been changed.

Group contributions enable swift transfers of income between group companies. A group contribution can be utilized, for example, by transferring profits and, at the same time, net assets from a subsidiary to its parent company. This may be particularly useful where the parent company shareholders are individuals whose dividend tax amount depends on the total of the parent company's net assets.

Group contributions are deductible expenses for the contributor and taxable income for the recipient

At the time of a contribution, the parties need to carefully comply with the tax and accounting requirements that regulate group contributions. For example, accounting regulations state, that for the contribution to be deductible in the contributor’s taxation, corresponding accounting entries concerning the contribution have to be made for both the contributor’s and the recipient’s accounts. Additionally, only a profitable company can make a contribution, which may not exceed its profit for the tax year before deducting the group contribution.

Who can benefit from group contributions?

According to the Group Contribution Act there needs to be a group relationship between the contributor and the recipient. For the referred relationship to exist, the parent company is required to hold at least a 90% stake of its subsidiary. The parent company may own the shares either directly or jointly (indirectly) with its subsidiaries. A group contribution can be made from the subsidiary to the parent company or vice versa, as well as between subsidiaries or sister companies. In addition, it is required that the group relationship has lasted throughout the tax year and that the financial years of the companies end at the same time. In mergers and acquisitions, care must be taken to properly schedule the group contribution in order to obtain a deduction.

A group contribution is only permitted between domestic companies. However, a Finnish permanent establishment of a company based in an EEA member state, or often a tax treaty state, may be involved in a group contribution. The intention of the legislator was to limit the possibility to give group contributions only to situations relating to Finland, so that when granting the right to deduct the group contribution, Finland would also have a reciprocal right to tax income. However, it is possible that as a result of EU law, Finland should, in the exceptional circumstances concerning final tax losses in another Member State, also allow the deduction of a group contribution in cross-border situations without having the equal right to tax the recipient company in its EU Member State.

As of 2020 the possibilities to benefit from group contributions have been significantly expanded due to the partial elimination of the income source allocation of corporations. Thus, any company whose income is determined by the Business Tax Act may give and can receive a group contribution. Hence, most companies and cooperatives will be covered by the group contribution regulation and will no longer be required to carry on business, as the law now requires. The change can be considered significant as, for example, a holding company managing passive investments may act as a contributor or a recipient for the purpose of tax-efficient group contributions.

Group contributions can be an alternative to dividend distribution

Transfer of profits from a subsidiary to its parent company is more often executed through distribution of dividends rather than by group contributions. However, both means are valid. A group contribution is more agile than dividend distribution, since it allows for a quicker transfer of income. However, when it comes to transferring profits from previous tax years to the parent company, it is not possible to use group contributions, as only the distribution of dividends is possible at this point. In addition, in most cases, if the income is to be transferred to a foreign company, dividend distribution is the only way.

Parent companies may also make other payments to their subsidiaries

Group contributions make it possible to transfer income from a subsidiary to its parent company or between subsidiaries. Other than when using group contributions, it is rarely justified that a subsidiary transfers income to its parent or sister company. The payment to the parent company is, in principle, likely to be considered as a distribution of profits.

In certain cases, the parent company may need to make payments to its subsidiary also in situations other than those covered by the group contribution provisions. If the conditions for a group contribution are not met, this kind of payment could be considered as a non-deductible group support for the party making the payment and taxable income for the recipient. However, under certain circumstances, the purpose of the payment may be considered to be to safeguard the economic activity of the subsidiary. Therefore, the payment could be regarded as a capital investment, in which case the payment should be added into the acquisition cost of the subsidiary’s shares. This kind of equity investment would not be considered as taxable income for the recipient.