Working Group Report on Taxation of Different Forms of Investment Published – More Competitive New Rules?
A working group set up to assess the tax treatment of different forms of investment published its report on Friday, 4 May 2018. The working group assessed the current tax treatment of different forms of investment in terms of functioning, neutrality and the extent to which the tax treatment is up to date and provides the right incentive. The assessment also looked at how the tax treatment for different investment products can be brought closer into line with each other.
No changes are proposed to the taxation principles applied to investment funds and non-UCITS funds. According to the report, the applicable tax regulations should nevertheless be specified more precisely in the Income Tax Act (the “ITA”) and the Withholding Tax Act, namely by implementing the definition of a special investment fund as well as clarifying the existing definitions of investment funds included in the relevant provisions of tax law.
The report discusses the general taxation principles applicable to private equity funds that are in the form of a limited partnership, recognizing also the problematic aspects related to investments by non-profit organizations and certain non-Finnish resident investors.
Currently, in order to make tax efficient investments in Finnish limited partnerships, non-profit organizations are in practice required to establish separate investment vehicles (so called feeder funds), through which the investments can be made in the form of a profit participation loan. Due to the administrative burden and costs related to the establishment and administration of said investment vehicles, tax efficient investments are currently possible only to the largest non-profit organizations. Further, the report recognizes that also restrictions on the deductibility of interest expenses may limit the feasibility of these structures in the future.
According to the working group’s assessments, specific tax rules or exemptions for non-profit organizations would be problematic taking into account the EU’s state aid regulation, and no such amendments are therefore proposed.
As regards investments by non-Finnish tax resident investors, in particular investments through so called fund of funds structures are problematic, as funds of funds are typically not entitled to tax treaty benefits, resulting in double taxation for the investors.
The working group states that there are valid grounds to extend the applicability of the existing tax rules to cover not only the limited partners of a Finnish limited partnership but also funds of funds. However, the conclusion of the report is that several technical issues would need to be assessed further and resolved before amending the relevant provisions of tax law (namely Section 9 Subsection 5 of the ITA).
The working group does not make a clear proposal for new rules, but concludes that if the tax issues related to investments in Finnish limited partnerships are wished to be fixed, one alternative would be to further assess the adoption of a flow-through model, where the tax treatment of the proceeds would be based on the underlying assets as if the investor would have made a direct investment. This would be a significant amendment to the existing tax system and requires further assessment and preparation.
The Finnish Venture Capital Association has proposed to simply revise Section 9 Subsection 5 of the ITA to cover all investors, allowing Finland to tax proceeds from private equity funds in the form of limited partnerships only if and to the extent direct investments to the underlying assets would be subject to tax.
The working group also proposes changes be made to the taxation of life savings insurance policies and capital redemption contracts so that the amount of the funds drawn that equates to the proceeds accruing on the amount paid into the policy or contract as a proportion of the savings should always be considered taxable income. Losses would be tax deductible upon termination of the contract. Specific regulation could be considered for artificial arrangements.
The working group proposes that the present tax sanction on lump-sum pensions be abolished and that these pensions be subject to the same tax treatment as that applied to life savings insurance policies and capital redemption contracts.
In the case of any investment savings accounts, further work would be required to examine a functional model in more detail.