Legal Alerts/27 Aug 2021

Taxation of Controlled Foreign Corporations Clarified in Finland

The Finnish Supreme Administrative Court has recently clarified the tax treatment of controlled foreign corporations (CFCs) in its ruling issued on 24 August 2021. This ruling, published as precedent, concerned the timing of CFC income. Our team of experts successfully represented the taxpayer in this case.

A brief outline of the case

The taxpayer, a private individual, was deemed to hold shares in a foreign CFC. The foreign entity realised a capital gain from the transfer of shares in January 2013. Later in the same year in May, the taxpayer relocated from Finland to another EU Member State, becoming resident in that state as provided in the relevant tax treaty. This tax treaty further stipulated that CFC income was taxable only in the state of residence.

Thus, the question was whether the CFC income was deemed to realise in January when the taxpayer was still residing in Finland for tax treaty purposes, or at the end of the CFC’s accounting year on 31 December when the taxpayer was treaty resident abroad.

The court ruled in favour of the taxpayer, confirming that CFC income is deemed to realise at the end of the CFC’s accounting period. This resulted from the structure of the Finnish CFC legislation, which is based on the calculation of CFC income at the level of the foreign CFC (as opposed to legislation where the CFC is fully disregarded for tax purposes).

Implications of this ruling?

This ruling clarifies the timing of CFC income. Although CFC legislation has been recently amended in implementation of the EU Anti-Tax Avoidance Directive, we expect the ruling also to be relevant in applying the current CFC legislation.

The taxpayer won this case in every instance of tax litigation. Despite this, the Supreme Administrative Court considered that the State does not need to reimburse legal expenses. The court referred to the nature of the case and to the legal question being subject to interpretation. In our view, this strict interpretation highlights what is a more general problem in Finnish tax proceedings – taxpayers are seldom reimbursed for their legal expenses even if they win the case.

If you have any questions regarding this case, please feel free to contact any of Borenius’ attorneys listed in this alert or those with whom you usually work.

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Additional information

Heikki Wahlroos



Anna Tallgren