Legal Alert – Borenius Successful Before Supreme Court in a Tax Fraud and Accounting Offence Case

Borenius’ Corporate Crime team successfully represented a Finnish individual before the Supreme Court in criminal proceedings regarding tax fraud and an accounting offence. The Supreme Court dismissed charges on tax fraud due to the lack of intent and waived the sentence on the accounting offence as the offence was deemed minor considering the time passed after the offence and the prior apprehension of the accused.

The Supreme Court’s ruling constitutes an important interpretation with regards to the requirement of intent to commit tax fraud. We are proud that we have once again gained a favourable ruling for our client from the Supreme Court in the ongoing endeavour of helping our clients to shape our common business landscape.

Background

In this case, a Finnish citizen, A, was the majority shareholder and the chairperson of the board of a Swiss-based company mainly engaging in business in Russia. The company maintained its bookkeeping in Switzerland, where the company’s board meetings also were held. The company paid all taxes to the state of Switzerland. However, as A resided in Finland and conducted some of the company’s business in Helsinki, he faced charges of tax fraud and an accounting offence, as the Finnish authorities deemed that the company had a permanent establishment in Finland and, consequently, had omitted its responsibility to pay taxes in Finland. The key questions in the case related to the intent of the alleged tax fraud and the accounting offence as well as to the interpretation of the tax treaty between Finland and Switzerland.

The case in lower instances

The District court ruled that the company had a permanent establishment in Finland due to the management office, through which A partly ran the business and that 100 per cent of the worldwide income of the company should have been allocated to Finland for taxation. It ruled that A intentionally had chosen not to file the company’s tax returns in Finland in order to avoid taxes and that the accounting documents were deliberately hidden in Switzerland. A was sentenced to prison, prohibited from engaging in business and had to reimburse the state of Finland in damages for the amount of lost taxes.

The ruling of the District Court was appealed to the Court of Appeal, which ruled that only ten per cent of the worldwide income of the company was subject to taxation in Finland due to the limited scope of the business conducted from the permanent establishment in Helsinki.

This interpretation corresponded with the conclusions of the Administrative Court. The Court of Appeal further ruled that A had justifiable reasons not to consider that a permanent establishment had formed in Finland and, as a result, neither of the offences were held to have been committed with intent.

The Supreme Court’s ruling

The Supreme Court granted leave to appeal on the question of intent of the offences. Firstly, the Supreme Court ruled that the tax fraud had not been committed with intent. While it was held that A, with a fair likelihood, could have understood that the company had a permanent establishment in Helsinki under the relevant tax treaty, this did not in itself result in tax liability or liability to file a tax return in Finland. Finland’s taxing power had only extended to the income, which belonged to the permanent establishment in Helsinki.

Taking into account that the company’s income nearly exclusively derived from outside of Finland and that all income had been taxed in Switzerland, the Supreme Court held that A could justifiably have been under the impression that no income belonged to the permanent establishment in Helsinki, even though Finland would have had taxing power with regards to the company’s income deriving from Finland. The Supreme Court ruled that A had not acted with intent, as it, from his point of view, was unlikely that the company was liable to file a tax return in Finland and that the filing of tax returns in Switzerland would constitute an intent to avoid taxation. As the statutory definition of tax fraud entails intent, the charges of tax fraud were dismissed.

However, the Supreme Court ruled that A was guilty of an accounting offence, but nevertheless waived the sentence based on the minor nature of the offence. A had not failed to fulfil his responsibility of bookkeeping as such, but rather only the responsibility to have the books regarding the Finnish permanent establishment in Finland. Furthermore, the Supreme Court noted that the tax treaty between Finland and Switzerland also governs the exchange of information between the two states. The imputable accounting offence was, therefore, not considered aggravated. The sentence for the accounting offence would have been a few day-fines. Nevertheless, taking into account the long time passed since the offence and A’s deprivation of liberty for two days in 2008 when he had been apprehended, the Supreme Court waived the sentence.

One of the Justices of the Supreme Court dissented with the Supreme Court’s ruling and would have convicted A of aggravated tax fraud and an aggravated accounting offence.

Borenius’ lawyers are available to assist in addressing any questions you may have regarding this legal alert. Please feel free to contact any of the Borenius’ attorneys listed in this alert or those with whom you usually work.