Government proposes changes to the taxation of cross border investments

1. Government bill drastically expands the scope of the Finnish CFC regime

A government bill published earlier this month on amending the Finnish CFC statute is currently being reviewed by the Finnish Parliament. The proposed amendments would become effective as of 2019. The key amendments can be summarized as follows:

  • Currently e.g. corporations resident in the EEA are generally not CFCs unless they benefit from targeted tax incentive.
  • Going forward a corporation resident in the EEA would be a CFC if it doesn’t carry on a substantive economic activity in its country of residence.
  • Corporations resident outside the EEA would have to meet three additional criteria to be exempted: (1) not resident in a country the EU considers “non-cooperative”, (2) adequate exchange of information is in place, and (3) the corporation carries out manufacturing activities, certain other comparable activities or related sales and marketing activities. Certain service activities would also qualify, but this service exception would generally not apply to e.g. group financing services and group management services.
  • The bill includes very strict control requirements. Under the proposal a corporation would a CFC if the shareholder, together with related parties (Finnish or foreign), owns more than 25 % of the corporation. Further, the draft lowers the ownership threshold used to define related party status to 25 %.
  • The bill would expand the scope of taxes that that are creditable when calculating CFC income by allowing in certain situations, a credit for WHT levied on dividend paid by the CFC.

If the bill is enacted in its current form, the Finnish CFC regime would expand fundamentally and result in increased uncertainty and administrative costs for taxpayers. The lower control and related party thresholds together with the more limited exemptions are likely to bring more corporations under the scope of the CFC regime.

2. Draft Proposal on taxation of private equity funds and funds of funds

The Finnish Ministry of Finance has published its draft proposal on amending Section 9 of the Income Tax Act related private equity funds and funds of funds in international situations.

The key changes proposed by the draft include:

  • The draft proposes a condition requiring that a limited partnership carrying out venture capital and private equity activities should be considered an alternative investment fund intended in the Act on Alternative Investment Fund Managers.
  • The draft further proposes an amendment to the tax treatment of foreign investments in a private equity fund, whose legal form is a limited partnership. According to the proposal, an investment could be also made through a fund of funds and the investment would be treated in taxation in the same manner as a direct investment in a Finnish target company provided that a double tax treaty would be applied to a foreign private equity investor.
  • The draft further proposes that a fund of funds should be registered in a state or established according to the legislation of a state with which Finland has a tax treaty in force.

The law would enter into force on 1 March 2019 and be applied for the first time in the taxation of the year 2019. However, concerning limited partnerships carrying out venture capital/private equity activities and registered before 1 March 2019, the requirement of applying the Act on Alternative Investments Fund Managers would be applicable for the first time in the taxation of the year 2024.

3. Draft Proposal on taxation of investment funds and non-UCITS funds

The Finnish Ministry of Finance published also a draft proposal on amending the definition of investment fund and adding a new definition of a non-UCITS fund in taxation.

The key amendments proposed by the draft include:

  • The draft proposes that the term investment fund would be removed from the section covering corporations that are tax exempt and added to a provision of its own. According to the proposed provision, an investment fund having at least 30 investors would be still exempt from tax. The aim of the new provision is to clarify the prerequisites for the tax exemption.
  • The draft further proposes be added to the Income Tax Act. The provision would include rules regarding the income tax exemption of the non-UCITS funds and the prerequisites for the exemption. Closed end funds or non-UCITS funds having less than 30 investors should among others distribute at least ¾ of profits (excluding unrealized gains) yearly. The distribution requirement applies to all non-UCITS real estate funds.
  • The exemption requires also that Finland has a tax information exchange treaty in place with the home country of the foreign investment fund or the non-UCITS fund where the fund has been registered according to the local applicable law.

The new laws are intended to enter into force on 1 March 2019 and those would be applied for the first time in the taxation of the year 2020.


Ossi Haapaniemi 
Mika Ohtonen