FINLAND: An Introduction to Real Estate

EU Taxonomy and Real Estate Operators 

The Taxonomy Regulation (EU) 2020/852 is one of the measures taken by the European Union to meet its objective of Climate Neutrality by 2050. The regulation entered into force in Summer 2020 and the first delegated acts containing the technical screening criteria for two of the six environmental objectives entered into force on 1 January 2022.

The EU Taxonomy is a classification system for sustainable economic activities. It is a regulation-based tool meant to help investors and companies in the transition to a more sustainable economy. The classification includes technical screening criteria for economic activities which make a substantive contribution to specified environmental objectives. In order to be considered taxonomy-compliant, activities must make a substantive contribution to one or more of the specified objectives. Such activities must do no significant harm to the other environmental objectives and certain social minimum safeguards must also be met.

The regulation has implications for the construction industry regarding the construction of new buildings and the renovation of existing buildings. However, it also affects investors and financial companies: they must ensure that their real estate investments are taxonomy-compliant should they wish to offer sustainable products. The regulation indirectly affects real estate operators seeking financing for their investments from the market. The compliance with Taxonomy will affect the availability and costs of financing in the future. Real estate operators might need to report and keep available the information in accordance with the Taxonomy should they want to ensure financing for their investments.

Transfer tax 

Acquisition of Finnish properties triggers a transfer tax which is a well-known transaction cost to the investors. The tax is levied at 2% for shares in real estate companies and 4% on direct ownership of real estate. Thus, the lower tax rate has resulted in Finnish real estate transactions mainly being executed as share transactions.

The transfer tax base is the purchase price of the shares. In addition, debt of the target company may be regarded as part of the transfer tax base. This applies to mutual real estate companies (MREC), which are the most common form of real estate holding in Finland. However, this rule does not, in principle, cover the purchase of shares in non-mutual real estate companies and holding companies of MRECs.

The above rules are based on case law published in 2019. Lately, there has been an increased interest in the use of non-mutual real estate companies as investment vehicles and the use of holding companies in the case of MRECs in the Finnish real estate market. It should also be noted that a transfer tax is not payable on acquisitions of interests in Finnish partnerships as intermediary holding vehicles or transactions where the target holding company and the parties are all foreign. The resulting decrease in payable transfer tax by the buyer is seen as a driver towards increased activity in the market.

The Finnish Real Estate Market amid the prolonged COVID-19 Pandemic

The COVID-19 pandemic has affected economic activity worldwide. Its drastic effects on how we live, work and travel are likely to last long after the crisis has finished. However, Finnish real estate has retained its appeal as an investment class particularly in the current low interest rate environment as the capital seeking for investment is high.

In Finland, the impact of the crisis has, from a global and even a European perspective, been less severe than in many countries. Following a decrease of 13% in the Finnish real estate market volumes in 2020 compared to 2019, the transaction activity was especially high in the latter part of 2021 – the transaction volume in 2021 increased by 24% from the previous year, and by 10% from 2019, a record year for real estate investment volumes. In 2021 foreign investors accounted for 54% of the total transaction volume, a sign of strong foreign investor interest in the Finnish real estate market.

Legal considerations on tackling the COVID-19 effects on the rental market

Landlords, both residential and commercial, have taken the hardest hit from the COVID-19 crisis due to the decreasing solvency of their tenants. From a legal perspective, the restrictions on movement, capacity and opening hours have raised the question as to whether these justify rent reduction or relief under the Finnish Act on Commercial Leases (ACL). The ACL is somewhat landlord-friendly in this regard. A decline in the business prerequisites does not directly justify such measures. The ACL gives limited opportunities for rent relief as the relevant provision concerning the adjustment of lease terms has seldom been applied in a court of law. The ACL gives limited opportunities for rent relief as the relevant provision concerning the adjustment of lease terms has been subject to strict construction and has seldom been applied in a court of law. The guiding principle is that, in a contractual relationship between commercial parties, grounds for adjusting the lease terms would require exceptional circumstances. As the COVID-19 restrictions have not been caused by either of the parties to the lease agreement and as they are not permanent, there is no specific provision in ACL that would provide legal grounds for decreasing rent or terminating the agreement. Depending on the tenant’s business sector and the location of the premises, the obligation to pay the rent may be a basis for force majeure to apply. However, force majeure is always subject to a case-by-case consideration and the bar for application is rather high. Nonetheless, negotiations on rent relief are likely to be mutually beneficial to the long-term relationship between the parties.

In 2020 and 2021, temporary amendments were made to the Finnish Bankruptcy Act due to the impaired solvency of companies. From 1 February 2021, the presumption of debtor’s insolvency was temporarily amended so that the debtor has 30 days, instead of the regular 7 days, to settle the payment claim and bankruptcy threat before the debtor is deemed insolvent. The last temporary amendments ended in September 2021. A dreaded wave of bankruptcies was avoided, and the number of bankruptcies in Finland between January and November in 2021 decreased compared to the equivalent period in 2019 before the pandemic. A prolonged pandemic will, however, inevitably impair the solvency of certain industries.

3D properties 

The ownership of a real estate with multiple owners has traditionally been allocated through a joint ownership agreement (JOT). Since 2018, it has been possible to establish 3D real estate, which has enabled the creation of overlapping real estate so that the ground level real estate forms the traditional base real estate and the others, underground or above ground level, form 3D real estate. Establishing 3D real estate provides an alternative to the JOT model, for example when establishing an underground parking garage. 3D real estate offers an interesting opportunity to anyone not willing to deal with the downsides of a JOT such as the term of the agreement and heterogeneity in the content.

Acquisition permit 

At the beginning of 2020, a set of legislation concerning real estate transactions took effect covering, to varying degrees, both asset and share deals. For instance, the new permit system, purporting to offer the Finnish state a means of protecting national security by implementing a new permit system, pre-emptive right and redemption which applies to asset deals executed with non-EU/EEA-domiciled purchasers only. As a part of this legislative package, real estate purchasers with a domicile outside the EU or the EEA, and those owned by at least 10% or factually influenced by such, need to apply for a permit to acquire Finnish real estate from the Ministry of Defence (noting this does not apply to share deals). However, the permit does not need to be applied individually per each transaction as it stays valid for as long as the ownership and the actual beneficiaries remain unchanged. As of October 2021, the Ministry of Defence had processed approximately 900 permits of which all were approved.