The new Finnish Act on Common Funds (213/2019) and certain amendments to the Finnish Act on Alternative Investment Fund Managers (162/2014, the “AIFM Act”) came into force on 1 March 2019. In addition, amendments were made to the Finnish Income Tax Act (1535/1992, the “ITA”) and to the Finnish Withholding Tax Act (627/1978, the “WHT Act”) that clarify the taxation of foreign mutual and special mutual funds.
Key changes introduced in the new Finnish Act on Common Funds:
- Regulations regarding mutual funds and special mutual funds (erikoissijoitusrahasto) are separated into different acts – from now on, provisions on special mutual funds are set out in the Finnish Act on Alternative Investment Funds Managers;
- Sub-funds can now be established;
- The requirement to hold a general meeting of the unitholders has been abolished; and
- The requirement for fund management companies to have a board member appointed by the unitholders has been replaced by a new requirement: at least a third of the board members must be independent board members.
Furthermore, the minimum number of unitholders has been reduced from 50 to 30 unitholders. The minimum number of unitholders must be achieved within one year from the commencement of the mutual fund’s activities. The Finnish Financial Supervisory Authority (the “FIN-FSA”) will no longer be able to grant an exemption from the time limit.
The fund rules of a common fund can now include conditions under which the management company can restrict redemptions and redeem units over the course of several days. This restriction can prevent the negative impact that one large redemption could have on the mutual fund’s liquidity. It also enables the continuation of smaller redemptions alongside a larger one.
Moreover, the management company will have the right to redeem units without a commission or the consent of the unitholder in certain situations set out in the Act and the fund rules. The redemption decision can be used only in exceptional situations when there are serious grounds for redemption that relate to the unitholder.
Changes to the AIFM Act
Where a fund is marketed to non-professional clients, a fully licensed alternative investment fund manager (“AIFM”) is now required to ensure that the fund is suitable for the intended target group. The FIN-FSA may prohibit marketing to non-professional clients if it determines that related requirements have not been met. A new provision obligates the FIN-FSA to issue an appealable decision within a specified time limit in the event that the FIN-FSA cannot accept the AIFM’s notification regarding the commencement of marketing.
The AIFM Act now also includes a new chapter on special mutual funds. Depending on the type of fund and the applicable minimum investment, a special mutual fund may have under 30 unitholders, under 10 unitholders or even just a singular unitholder. If the special mutual fund has under 30 unitholders, all must be professional clients or comparable wealthy private individuals. A special mutual fund can deviate from the rules that generally apply to mutual funds e.g. in relation to the subscription and redemption of units (and, accordingly, be less open-ended).
Additionally, the “fit and proper” requirements that already applied to authorised AIFMs will also apply to the management and significant owners of registered AIFMs (“sub-threshold” AIFMs) from now on.
Clarifications regarding the taxation of mutual and special mutual funds
Both mutual and special mutual funds are currently tax exempt in Finland. However, Finnish tax laws do not include specific provisions on the characteristics of tax-exempt funds. The lack of specific provisions has made it difficult, in some cases, to compare foreign funds that have different legal structures than Finnish funds do.
The tax treatment of foreign funds is based on the European Union’s principles on the free movement of capital and on the comparability of the foreign fund with the characteristics of Finnish tax-exempt mutual and special mutual funds. A number of cases are currently pending in Finnish courts that pertain to various foreign funds and their comparability to Finnish funds under EU law. The new legislation states that only foreign funds that are contractually set up can be comparable to Finnish mutual funds. The compatibility of this requirement with EU law is subject to interpretation.
The required number of unitholders in special mutual funds will be lowered from 50 to 30. This means that a broader group of special mutual funds and their unitholders will be able to benefit from tax deferral. The tax exemption requirements for both Finnish and foreign mutual funds and special mutual funds will be set out in Section 20 a of the ITA:
- For common funds to be tax exempt, (i) they must be contractual; (ii) have at least 30 unitholders; and (iii) be open to the public and be open-ended (i.e. common funds are obliged to issue and redeem units);
- Special mutual funds that have at least 30 unitholders are tax exempt under the same requirements as mutual funds;
- Special mutual funds that have under 30 unitholders or which cannot be deemed as open-ended may qualify as tax-exempt if (i) they annually distribute at least three quarters of the accounting period’s profits (excluding unrealised appreciation in value); (ii) the fund’s minimum capital is at least two million euros; and (iii) all unitholders are professional investors or comparable wealthy private individuals. The foregoing also applies to foreign contractual funds that correspond to special mutual funds; and
- Special mutual funds that primarily invest in real estate or real estate companies may qualify as tax exempt if they annually distribute at least three quarters of the accounting period’s profits (excluding unrealised appreciation in value).
Funds registered outside the European Economic Area must be registered in a country with which Finland has concluded a treaty on the exchange of information. Furthermore, in order to benefit from the exemption on withholding tax, the foreign fund must demonstrate to the Finnish Tax Administration that it meets the requirements for tax-exempt funds as set out above.
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