Verotus 2/2009: CFC-legislation facing amendments. (Väliyhteisölaki muutosten edessä) / Einari Karhu
An article written by Einari Karhu, originally published in Verotus 2/2009. The entire article in Finnish is available from the link below.
Short summary in English:
CFC-legislation facing amendments
The profits of a corporate entity are normally taxed only in the entity’s state of residence. The shareholders are taxed only if the entity makes a profit distribution. Taxpayers may take advantage of foreign entities in tax planning. Finland has taken special legislative action in order to avoid the loss of tax revenue due to the use of CFCs. The Act on the Taxation of the Shareholders in Controlled Foreign Corporations may be applied if one or more Finnish residents control a foreign corporate entity in a low tax state. The profits of the controlled foreign separately taxable corporate entity may be taxed as income of the Finnish resident shareholders or other beneficiaries.
The application of CFC-regimes has been questionable because of the principle of freedom of establishment. ECJ ruled in 2006 (C-196/04, Cadbury Schweppes) that the CFC treatment must exclude all other entities of the EU and EFTA States except those which are a part of a totally artificial tax avoidance arrangement. In consequence of the ECJ judgment, the Finnish CFC-regime was considered contrary to EU-treaty and had to be amended. The article analyses the amended provisions and consequences thereof.