Financial dues and profit of sales

In Finland, the sales profit received from selling one’s own home is tax free if the owner has owned and lived in the house or apartment for at least 2 years. The Supreme Administrative Court has given a judgment KHO 2016:169 concerning a case where a house owner had not lived in his apartment but had rented the house to his daughter who had paid lower rent than a market-based rend would have been, and the financial dues paid by the owner to the housing company could have been deductible from the rental income. The part of the housing company’s loan amortized by the financial dues paid could not be deducted from the profit in this case. 

A corresponding idea is included in the judgement KHO 2003:55 where the Court regards that the mortgage interests are not deductible from rental income if the tenant pays rent lower that a proper market-based rent. 

The ratio decidendi of the above cases is based on a situation where a taxpayer is not granted any tax relief because the contract is not an “arm’s length transaction” and the agreed rent is less than the market-based rent. 

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Residential buildings are such that the housing company owns the building and the land where the building stand – unless the land is rented. New residential housing companies have large debts to pay the construction of the building. Constructors own the share capital of housing companies. Shares of the housing company entitle to possess a specific apartment in the building. Selling prices may be 300.000 euro but buyers (new shareowners) pay only eg. 20 % of the price to the constructor; the rest of the selling price consists of a part of the loan of the housing company. 

The housing company receives payments from the shareowners who pay maintenance charges to cover up the annual maintenance costs, and financial dues to cover the amortizations of the housing company loan and its interest. What is the taxation of shareholders with respect to financial dues?

The taxation praxis and the legal praxis are somehow illogical, and the tax decision has been rectified only after a tax appeal made by the taxpayer. In 2013, the Administrative Court in Helsinki gave a judgement concerning tax on profit related to selling of housing company shares. The taxpayer had lived in his house less than 2 years and had received no rental income. Thus, the sale of shares was not regarded to be tax free.  In this case, the Administrative Court noted that the construction project debt was partially paid by the financial dues. Thus, the financial dues constituted a part of the acquisition price and could be deducted from the selling price. No attention has been paid to this case in the guidelines of the tax administration.

The guidelines drafted by the tax administration are difficult to understand and cause confusion because the taxation of the banks and construction firms carrying on business is mixed up with the taxation of individuals. The legal praxis has shaped during the 1970’s – 1990’s. The judgements of the Supreme Administrative Court include such sentences like “the financial dues have been logged as revenue in the bookkeeping” or “the financial dues have been capitalized in the books” and even “it is meaningless what the treatment of the financial dues in the bookkeeping is”. 

  • A share owner of a housing company had paid off the whole part of the housing company loan at one time. The payment is regarded to constitute a part of the acquisition price, and such deductible from the sales profit (KHO1971 II 556). 
  • Financial dues are written as revenue in the books of the housing company and are deductible from the rental income (KHO 1975/607 B II 541). In this case, the financial dues were not written in the balance sheet account. 
  • Financial dues were carried primarily to cover up the loan interests and financial costs of the company, and the renting business was profitable. Thus, the financial dues are deductible from rental income (KHO 1991/2275). 
  • A construction firm can deduct the financial dues also for the part of amortization of loan because the real estate company had written the financial dues as revenue (KHO 1994/5408, KHO 1996/2621). 
  • A bank had established a real estate company which was an investment in the bank’s balance. Financial dues were paid mainly to cover up the loan interests. The bank was entitled to deduct the financial dues from rental income (KHO 1998/669).
  • Financial dues are regarded to constitute a part of selling price. This case is about tax avoidance (KHO 1999/2311). The financial dues are deductible from rental income if: 
    • loan interest are covered by the financial dues,
    • the payment covers the part of amortizations corresponding to the depreciations from fixed assets. 
  • Financial dues covering up the costs of repairing the pipes of the house are regarded to be additional investment into the housing company and thus deductible from the sales profit.  It was irrelevant how the financial dues were written in the books of the housing company (KHO 2.12.2004 taltio 3113). 

The taxpayer must be active and seek for rectification if the tax decision seems to be illogical to him. Unfortunately, because of the messy tax praxis the taxpayer must meet or be prepared to meet the cost of the proceedings himself in cases where the judicial situation is “unclear”. 

Anne Nikula

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