Finland: Finnish Supreme Administrative Court Case Concerning CFC Legislation

Last Updated: 22 June 2011
Article by Janne Juusela and Sanna Lindqvist

The Finnish Supreme Administrative Court (SAC) gave on 27 April 2011 a preliminary ruling (KHO:2011:42) based on which a Singaporean subsidiary could not be treated as a controlled foreign company (CFC) in the taxation of a Finnish company in tax year 2009.

The basic idea of the CFC legislation (the Act on the taxation of shareholders in controlled foreign companies, 1217/1994) is that a share in the income of a foreign company classified as a CFC can be considered as taxable income in the hands of a Finnish resident taxpayer, irrespective of whether that income has been factually distributed to the hands of that Finnish resident or not. Whether a foreign company is classified as a CFC or not may thus have significant impact in Finnish taxation.

A CFC is defined as a non-Finnish corporate body which is under the direct or indirect ownership or control of a Finnish tax resident and de facto liable to less than 3/5 of the corresponding Finnish level of income taxation. However, a corporation resident in a country with which Finland has a double tax treaty in force is not considered as a CFC provided e.g. that it is liable to pay an income tax in that country which does not substantially deviate from the corporate income tax which corporate bodies must pay in Finland, and furthermore that the corporate body in question has not profited from any specific tax relief legislation of that country. For corporations located outside the EU, the income tax of a CFC is considered substantially lower than Finnish income tax if the corporations in this country, on the basis of its legislation, are liable to pay an income tax, the actual and total amount of which, on average, is less than ¾ of the actual income tax paid by corporations in Finland (i.e. 19.5%, when the Finnish corporate income tax rate is 26%). A decree (a "black list") stating which countries are considered as such low-tax jurisdictions is issued by the Ministry of Finance.

Irrespective of the above, companies from EEA or tax treaty countries could nevertheless escape the CFC status if they have de facto been established in the country in question and if they carry on genuine economic activities in that country (the "manufacturing exemption").

In the case brought to the SAC, a Finnish company owned a Dutch subsidiary which in turn owned a Singaporean holding company. There was a tax treaty in force between Finland and Singapore and it was clear that the Singaporean company had not benefited from any special tax relief in Singapore. As the Singaporean company was a mere holding company, it was not possible to apply the manufacturing exemption.

Assuming the actual level of income tax of the company was shown to be less than 3/5 of the corresponding Finnish level of taxation, the crucial point remained to determine whether the average actual level of corporate taxation for Singaporean companies was less than ¾ of the actual income tax for Finnish companies.

Prior to certain changes made in the Finnish CFC law, effective as of 1 January 2009, partly outdated guidelines by the Finnish tax authority were applied in this regard. Singapore was specifically noted as a low-tax jurisdiction in the guidelines. After the updates in the law became effective (i.e. as from 2009), inter alia requiring the Ministry of Finance to issue a decree on the black-listed countries going below the ¾ limit, the problem was that no such decree had yet been issued. The black list decree was issued later on so that it become in force as of 1 January 2010. The lack of the decree was a severe deficiency as one of the main purposes of the legislative changes was explicitly to improve the clarity and predictability from the taxpayers' perspective.

Despite the previous guidelines and the preparatory acts mentioning Singapore as a low-tax jurisdiction, the SAC therefore felt compelled to rule in favour of the taxpayer. In lack of a properly enacted black-list decree, the Singaporean holding company could not to be treated as a CFC in the tax year 2009.

From 2010 onwards, the decree includes the Arab Emirates, Barbados, Bosnia-Herzegovina, Georgia, Macedonia, Malaysia, Moldova, Montenegro, Serbia, Singapore, Switzerland and Uzbekistan as low-tax jurisdictions. The SAC ruling emphasizes the role of the decree. The government is urged to take care of its functions, and the taxpayers do not need to fear that companies located in other tax treaty countries than those specifically black-listed would be treated as potential CFCs. In the future, the Ministry of Finance should regularly update the black list when tax treaties are concluded with new countries and when tax treaty countries make significant changes to their tax systems or tax rates. Estimating the level of taxation in other countries is definitely not an easy task, and e.g. coming out of the black list might prove a fairly lengthy process.

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.

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