On 6 June 2008 the Finnish Government issued a Bill to amend the current CFC legislation. The Government Bill contains a law proposal that would affect the application of the Finnish CFC regime. If adopted, the Bill would narrow the scope of application of the CFC legislation, but could also require organization of current company structures.

The Bill proposes amendments to the existing regulations especially with regard to the definition of a CFC entity. The Bill also proposes amendments to the provisions concerning the determination of the amount of taxable CFC income, the deduction of the losses of a CFC entity and the foreign tax credit.

According to the proposal, with certain exceptions the CFC legislation would not apply, if following conditions are met:

  • the entity is resident in a Member State of European Economic Area or in a tax treaty partner state, and

  • on the basis of objective factors ascertainable by third parties, the controlled entity is actually established in the host State and carries on genuine economic activities there.

Exceptions apply to entities established in countries that either are listed in the black list provided by the Ministry of Finance or do not exchange appropriate information with Finnish tax authorities to ensure the actual establishment and genuine economic activity of the entity.

The proposed amendments would not affect the current tax treaty state exception of the CFC legislation and, thus, an entity residing in a state with which Finland has a tax treaty would not fall under the scope of application of the CFC regime if:

  • the tax burden under the general corporate tax system of that state is comparable to the corporate tax burden in Finland, and

  • the entity has not been subject to a special tax benefit in its state of residence.

If the two requirements are met, an entity in a tax treaty state is excluded from the scope of the CFC regime regardless of the level of establishment and irrespective of the actual tax burden of the entity. However, general anti-abuse rules apply.

In addition to the proposed narrowing of the scope, the Bill proposes the foreign permanent establishments in low tax jurisdictions to be comparable to foreign legal entities. Hence, in some cases a permanent establishment of a foreign subsidiary could be regarded as CFC entity even though the subsidiary itself would not conform with the require-ments of CFC entity.

Currently, a shareholder is liable to tax on the CFC income if the person holds an interest of at least 10% of the Finnish controlled foreign corporation's capital or an interest, which entitles to a 10% share of the corporation's return on the assets. The Bill proposes an increase of the interest level to 25%. Thus, no CFC taxation would occur if the interest of separate shareholders would not exceed 25%.

The Bill is expected to be adopted by the Parliament during the fall 2008 and it would be generally effective for fiscal years commencing on or after 1 January 2009. However, a transitional period is proposed for permanent establishments already formed.

If the proposed Bill is approved as presented, the amendments could affect the acceptable structures of Finnish-owned foreign entities. The need for restructuring should be considered to assure the compliance with the new requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.