An Yle investigation has found that a company in charge of 20 percent of Finland’s electricity network, Caruna, pays very little tax on the 50 million euros in profits it made in 2014. The firm, which is largely owned by foreign investors, has recently announced price hikes of one third for many of its customers.
In 2014 the company made a profit of 50.5 million euros, and paid corporation tax of just over 800,000 euros. That’s a taxation rate of just 1.6 percent, and it’s achieved by legal tax avoidance schemes involving holding companies based in the Netherlands.
In the same year Caruna paid millions to holding companies in the Netherlands to service loans. Up until 2014 Caruna was owned by the state-owned energy firm Fortum, but was then sold off to investors. Although the municipal pension fund Keva and the private pension fund Elo bought some of the stock in the new firm, 80 percent of the shares went to international investors.
Yle looked at Caruna-linked firms’ accounts and loan agreements in Finland and the Netherlands over several years, finding that the Finnish Caruna companies had taken loans totalling more than a billion euros from their owners. In 2014 it paid back 76 million euros, helping to create a loss on paper that minimised its tax bill.
Although the Caruna Oy firm, which handles the firm’s operations, made a 50.5 million euro profit, after financing costs that changed into a 7.6 million euro loss. The firm ended up paying 822,000 euros in corporation tax, a rate of just 1.6 percent.
No decision from tax officials
Caruna Managing Director Jyrki Tammivuori told Yle that the holding companies are based in the Netherlands at the owner’s behest. In December 2013 the Dutch firm Suomi Power B.V. lent 972 million euros to the Finnish company. The interest rate on that loan was 8.5 percent—a hefty increase on a loan of 150,000 euros granted in March of that year, on which the Dutch firm charged 5.33 percent plus the euribor reference rate.
According to Finnish law internal company loans cannot be made at significantly higher interest rates than available on the commercial market. Tammivuori says Caruna has not asked for an official ruling from the tax office on his firm’s arrangements.
"We haven’t asked for a preliminary decision, but we have discussed this with the tax office," said Tammivuori.
Loans like these help companies to transfer wealth from high tax regimes like Finland’s to lower tax jurisdictions like the Netherlands.
"Our owners are foreign infrastructure investors and Finnish pension funds, and using foreign holding companies is entirely normal practice in this kind of arrangement," said Tammivuori.
Good corporate citizen
But does Tammivuori regard his firm as a good corporate citizen and taxpayer?
"Yes, I do," answered Tammivuori.
The firm’s arrangements are entirely legal, as the company has the right to minimise its tax bill using these methods. However the Dutch government has been criticised for allowing these schemes.
The European commission estimates that illegal tax evasion and legal tax avoidance combined cost EU taxpayers around a trillion euros. In October 2015 it forced Holland to collect an extra 20-30 million euros in tax from the US coffee chain Starbucks, which the company had avoided paying.
Other big firms including Fiat have also felt the EU’s wrath as it struggles to deal with the problem.
"Tax rulings that artificially reduce a company's tax burden are not in line with EU state aid rules,” said EU Commissioner Margrethe Vestager after delivering the verdicts on Starbucks and Fiat. “They are illegal. I hope that, with today's decisions, this message will be heard by Member State governments and companies alike. All companies, big or small, multinational or not, should pay their fair share of tax."