Up Again: Government relief and tax
Government relief and tax Q&A
Legislative changes: are there any additional processes or support which have been introduced as a response to the pandemic which I may not have considered previously?
Is there anything else I should look out for?
The government introduced a bill restricting the creditor’s right to file for bankruptcy on 16 April 2020. The amendment entered into force on 1 May 2020 and will remain in force until 31 October 2020.
What is the position with respect to the applicability of emergency tax measures , including what they are and apply to, when they are expected to be phased out on or following a return to business, and whether any transitional periods are likely to apply.
Emergency tax measures include (applied to all businesses unless otherwise provided):
- the prepayment tax can be lowered by company’s request without interim financial statements or other written clarifications;
- the possibility to request a payment arrangement regarding overdue prepayments;
- the Finnish Tax Administration has granted one month of extra time for filing tax returns to corporate entities whose accounting period ended between December 2019 and February 2020;
- a payment arrangement for temporary financial difficulties may be requested with eased terms;
- a legislative amendment that will temporarily lower late-payment interest rates for taxes in a payment arrangement is being prepared;
- the Finnish Tax Administration is making preparations to refund the VAT that companies have paid during 2020 to companies that request it (however, this refunded VAT will have to be paid back at a later date as part of a payment arrangement);
- should a company as an employer fail to make timely reports to the Incomes Register (in Finnish: tulorekisteri), no late-filing penalties are imposed in 2020 (however, if a company has not filed all required tax returns, no payment arrangement can be granted to such company).
The Finnish Tax Administration has not informed of any transitional periods.
From a tax point of view, it is to be noted that the financial aid or subsidy received to cover the expenses of business operations is taxable income for the recipient of the financial aid or subsidy.
Are there specific steps that businesses should take to prepare for these tax measures being phased out – for example new timing of payment obligations (and therefore likely pressure on cash flow); and/or filing of returns?
If a company has requested a payment arrangement, and if the payment arrangement is granted, such company should make payments according to the granted payment arrangement.
Please note that the Finnish Tax Administration has granted one month of extra time for filing tax returns to corporate entities whose accounting period ended between December 2019 and February 2020.
Should the impact of emergency tax measures be reconsidered by businesses – e.g. are there certain legal transactions (such as sales or reorganisations) that parties should preferably postpone or accelerate?
From a tax point of view, the emergency tax measures do not have such impacts.
Are there any additional measures proposed, in particular any that are targeted at particular sectors (e.g. aviation)?
From a tax point of view, there are no such measures that are targeted at a particular section.
Are there any sectors or interest groups that are now putting forward, or may in the near future request, special tax measures?
The following can be noted:
- legislative amendment that will temporarily lower late-payment interest rates for taxes in a payment arrangement is being prepared; and
- the Finnish Tax Administration is making preparations to refund the VAT that companies have paid during 2020 to companies that request it (however, this refunded VAT will have to be paid back at a later date as part of a payment arrangement.
Which taxes might be increased to address the financial burden caused by the crisis, for example, are there political commitments or policy trends that might indicate the likely focus of any tax increase in the future (e.g. to maintain low corporation tax, but to increases taxes on personal wealth) or measures to broaden the tax base, such as digital services taxation and a pre-emptive response to the OECD/ G20 Inclusive Framework on BEPS (“BEPS 2.0”).
According to a report concerning the economic effects of COVID-19, taxes will be raised in the future. A link to the summary of the report (in Finnish):
Are there other actions that ought to be considered by businesses in your country e.g. revisit past tax filings to claim carry back of losses, revise or update preliminary tax assessments or claim bad debt relief for VAT output tax.
Business may, in the future, request for refund of the VAT that businesses have paid during 2020 (however, this refunded VAT will have to be paid back at a later date).
What do you need to consider in terms of your funding requirements for returning to business and are there any return to business financial assistance packages being made available by government?
If your business has temporarily closed, there will in a number of cases be a delay between the incurrence of costs to restart your business and the consequent receipt of income. Consider how you will finance that gap. In particular, if you have any remaining availability under any revolving credit facility, note that there will likely be a draw stop on new funding if a Default (or occasionally Event of Default) is continuing.
The Finnish government has introduced a number of assistance packages to help corporates and smaller businesses. More information of the packages can be found here.
How will funding a return to business, including taking on additional indebtedness, impact on your financial or other covenants?
If your business has temporarily closed, consider how to approach the effect that such closure will have on the ability of your business to comply with any maintenance financial covenants. Consider whether a waiver, or indeed full covenant re-set, will be needed for future test dates (and then also consider when would be an appropriate time to try to determine what those re-set covenants should be).
Particular considerations include (i) (of course) the decrease in revenue/EBITDA over the lockdown period, (ii) any likely tapered increase in revenue/EBITDA as lockdown restrictions are relaxed (iii) costs for restarting the business and (iv) payment of any deferred payments.
Are there any remedies such as equity cure or margin ratchets that you should be checking on to provide liquidity to prevent a default or improve their financial position?
Generally said, it is recommended to review the mechanisms allowed under the credit agreement and discuss with the lenders as soon as possible.
If it is not possible to agree a waiver or amendment to your maintenance financial covenants, it is recommended to review the equity cure rights under the credit agreement.
Given the negative impact on financial condition on a number of businesses, if the Margin that you pay is subject to a ratchet it will likely increase as financial condition deteriorates (e.g. as leverage increases) and Margin is usually set at the highest level if an Event of Default is continuing.
What practicalities do you need to consider in relation to audit requirements?
Due to the coronavirus epidemic, the Parliament of Finland has enacted a temporary law under which companies can, under certain conditions, postpone the meeting where the financial statements are approved until the end of September 2020.
The law applies to the financial periods that have ended between 30 September 2019 and 31 March 2020. Companies must hold the meeting about approving their financial statements by 30 September 2020.
However, it should be made sure that any reporting obligations agreed with your lenders are also complied with or postponed, if possible. Therefore, the credit agreements should be reviewed. Consider the deadlines to deliver to your lenders your audited financial statements and the practicalities of your auditors being able to carry out their audit.
What is the process if I need any amendments made or waivers given under my loan documentation (including in respect of financial covenants)?
First of all the required proportion of lenders agreeing the requested amendment or waiver should be considered. Amendments to financial covenants generally require consent of majority lenders. Practically, reasoned plans and appropriate forecasts tend to affect the decision making positively.
In general, it is recommended to review your credit agreement to make sure that you have an overview of the applicable undertakings and covenants, and further, to reach out to your lenders in due time to discuss and negotiate your current situation.
Dealing with creditors, including amendments and waivers – If I can’t comply with the terms of my bond covenants who do I need to notify?
It should be checked whether the non-compliance with the covenant as such would be an event of default (as determined by the governing document of the bonds) or whether the matter can be cured.
Typically the bond documentation provides that the issuer shall immediately notify the trustee (bondholder representative) if the issuer becomes aware of
- the occurrence of an event or circumstance which constitutes; or
- would (with the expiry of a grace period, the giving of notice, the making of any determination or any combination of any of the foregoing) constitute an event of default.
Additionally, public announcements filed under the securities market legislation and/or applicable exchange rules may be required.
Most investment grade bonds do not have financial covenants. High yield bonds typically include both financial covenants and other undertakings. Violation of payment obligations and/or breach of the covenants, representations and undertakings may result in the event of default. In the COVID-19 crisis, in addition to non-payment, the terms regarding cessation of business, cross default, insolvency and insolvency proceedings can play a role, if they are broadly defined.
Also, for all of the above, the issuer should consider information obligations, possible repair times and/or opportunities and deadlines to apply for waiver, if needed.
Dealing with creditors, including amendments and waivers - b. If I need to ask for a waiver or amendment to the terms of bonds issued by my business what steps do I need to take?
Finnish law does not include provisions regarding waivers or amendments to the terms of the bonds. Governing documents for bonds will usually have a detailed waiver and amendment procedure spelled out.
The terms and conditions of the agreement determine the steps. Generally, the issuer and the agent may agree to waive or amend any of the terms, provided that such waiver or amendment is not detrimental to the interest of the bondholders or such waiver or amendment is required by applicable law, court ruling or administration decision.
In other cases, it should be expected that consent from bondholders representing at least 50 per cent of principal amount outstanding will be required for amendments. Amendments to interest payment dates, changes to collateral security arrangements and waivers of a breach of, or an amendment of, the issuer’s undertakings typically require a qualified majority, such as 66.6 per cent or 75 per cent, depending on bond documentation.
In such a case, a bondholder meeting or a written procedure shall be initiated to approve such waiver or amendment.
As a matter of first instance, an issuer should have counsel review the amendments and waivers section of the bond documentation, as well as to seek advice regarding prudent public communications under applicable securities laws and regulations.
Dealing with creditors, including amendments and waivers - What is the process for contacting bondholders and holding meetings to agree changes in the terms of my bond documents?
To obtain bondholder consent to an amendment, a consent solicitation process will be required. An amendment to the bond documentation shall usually require either a noteholders meeting or a written procedure, both as convened/instigated by the trustee, as the case may be.
Bondholder meetings will be governed by a combination of the bonds' governing documents and local statutory provisions, to the extent applicable.
Is the availability of any return to business funding or relief either (a) conditioned on the use of proceeds for green or social purposes or (b) linked to sustainability-related outcomes? If so, what are the applicable purposes or outcomes?
The Finnish government has initiated a number of relief packages to provide support for businesses and citizens in getting through the COVID-19 crisis without deep losses. The packages are to provide economic relief in different situations and are subject to different terms, but are generally not conditioned on the use of proceeds for green or social purposes or to sustainability-related outcomes. Businesses may make use of more than one relief package. It is, however, not possible to obtain compensation for a loss more than once. More information of the relief packages can be found here.