Finland: Legal Framework of Investing in Finland

Originally published in European American Business, 2006.

Finland has gained a place among the richest industrial countries in the world. Today, worldwide trading in a wide variety of commodities is an integral part of the culture within the Finnish business community. In addition to being a world leader in forest based industries, Finland has an advanced metal industry and pioneering electronics and technology industry. Telecommunications equipment and other information technology, environmental technology, industrial automation, medical electronics, biotechnology and energy production technology are among the high-tech sectors in which Finland competes on the world-class level.

The legal and fiscal environment in Finland has always been stable and currently reflects international trends and developments. Our economy is one of the most open in the world with virtually no barriers for foreign ownership and investments. The Finnish government has recently announced and executed further plans to ensure the equality of foreign and domestic investors in Finland and to promote foreign investments in Finland. Tax neutral foreign investments in Finnish private equity and venture capital funds have, for example, been facilitated by recent amendments to limited partnership tax legislation.

Additionally, a government bill proposing a revision of the Finnish Companies Act was issued in the autumn of 2005. The proposal is currently under review in the parliament and the new Companies Act is expected to enter into force during the autumn of 2006. This new Companies Act will bring even more flexibility and operating/financing freedom into the Finnish corporate environment. It will also increase the operating freedom of limited liability companies by removing impractical restrictions and decreasing the formality of several procedures. At the same time, legal protection of creditors and minority shareholders will be improved.

The Finnish Securities Markets Act aims to ensure financial stability and public confidence in the financial markets. The act promotes openness and efficiency on the market as well as the independence and contractual freedom of the market participants. During recent years, Finnish security legislation has been amended and modified in order to harmonise it with international market developments and EU regulations.

The act regulates issuance and marketing of securities, listing and public trading of securities, investment services, clearing operations and public tender offers. It also contains provisions on market abuse as well as consequences and supervision thereof.

Market self-regulation, e.g. rules of the stock exchange, also plays a major part in the organisation of the Finnish securities market.

The Finnish venture capital industry emerged and grew rapidly in Finland during the early 1990s. At the end of 2004, Finnish private equity and venture capital firms managed over €3 billion allocated over 120 PE and VC funds, which figures are continuously increasing.

There is no sector-specific legislation for private equity and venture capital funds. Private equity funds are usually structured as limited partnerships, in which a private equity firm acts as general partner and the investors as limited partners. The limited partnership-structure enables a flexible co-operation between partners and a limited liability for investors.

Compared with UK and US equivalents, the limited partners (the investors) have traditionally had an active role with respect to the management of the fund (through an active participation in the funds’ investment committees). This feature has, however, been declining and recently established funds have circumscribed the limited partners’ managerial rights. Finnish limited partnership legislation respects the limited liability of the funds’ limited partners irrespective of whether the limited partners have an active role in managing the fund or not.

During the past decade, the Finnish banking sector has changed fundamentally. The rapid development has been caused by continuous growth of information technology, harmonisation of financial markets within the EU and mergers and co-operations within the banking industry and between the banking and insurance industries.

Finnish banking legislation is to a large extent based on the EU banking directives. The main stipulations are included in the Credit Institutions Act. The Act regulates credit institutions engaged in professional lending or other financing activities. An entity is under the scope of the Credit Institutions Act and it needs an authorisation for its operations if activities are carried out on a professional basis and if activities include raising repayable funds from the public and the entity provides financing on its own account.

The real estate sector has traditionally been heavily regulated from a contractual point of view. All purchase contracts related to real property must meet certain mandatory requirements as stipulated by the Code of Real Estates.

Despite this mandatory legislative environment encumbering real estate investing, there are no requirements concerning the nationality (or the residence) of a purchaser of property. It is sufficient that the seller and purchaser are legally competent, and that the transfer of title is done in accordance with the provisions of the Code of Real Estates and the Contracts Act. The Finnish real estate registry and title system I is one of the most advanced and reliable in the world.

Companies resident in Finland are liable to tax on their worldwide income. In addition non-resident companies are taxed on their income derived from Finland. The corporate income tax rate in 2006 is 26%.

When dividends are paid to foreign investors, Finland levies a withholding tax. Typically the withholding tax rate is 15%. Dividends paid to non-EU and non-tax treaty countries are levied with a withholding tax of 28%. If shares fall within the category of a direct investment (non-portfolio investment ie the ownership in the company exceeds 20%), and if the company receiving the dividend fulfils the requirements of the EC Parent- Subsidiary Directive, no withholding tax is levied on dividends. Limited partnerships and other partnerships are treated as flow-through entities for the purposes of Finnish taxation. Income from a Finnish limited partnership structured private equity or venture capital fund received by a foreign investor residing in a tax treaty country and having a limited tax liability in Finland (where the treaty is applicable to this investor), and who is acting as a limited partner to the relevant PE/VC fund, is taxable only on the part of the income that would have been taxable in Finland if the investor would have received it directly (and not through the fund).

As briefly presented above, the legal framework governing investments in Finland is reasonably similar to that of other Western European EU countries. It is advisable, however, that a foreign investor contemplating investments into Finland contacts domestic investment advisors (financial and legal) to facilitate a risk-free execution of the desired investment.

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.