The Finnish Supreme Administrative Court (“SAC”) issued a new precedent (KHO:2022:130) on 15 November 2022 confirming that US trust-based investment funds can be deemed as tax exempt on Finnish-source dividends also under the new tax provision introduced to Section 20a of the Finnish Income Tax Act (“ITA”). The SAC’s precedent clarifies the tax treatment of foreign investment funds that constitute trusts in Finland. Borenius acted as advisor in the proceedings.
Key points of the SAC’s precedent
Trusts can be considered objectively comparable to Finnish investment funds
The SAC’s precedent concerned the sub-fund of a US non-listed investment fund in the form of a Delaware Statutory Trust. The sub-fund had its own legal identity, but it was not separate or independent from the Trust. The sub-fund in question was an open-ended fund with more than 90,000 unitholders.
The SAC made clear that foreign investment funds that constitute trusts can be considered objectively comparable to tax-exempt Finnish investment funds based on the new tax provision introduced to Section 20a of the ITA. This means that a tax exemption granted based on the ITA cannot be rejected solely because the legal form of a US trust-based investment fund differs from that of a Finnish contract-based investment fund.
Focus on the provision’s purpose rather than the legal form of the fund
The SAC outlined in its decision that, instead of the legal form, the focus should be on the purpose and the objectives of the domestic provision at hand, which in this case is to avoid the double taxation of the investment funds and to treat investments made through funds similarly to direct investments. The same purpose and objective should also be respected in the tax treatment of foreign investment funds.
The outcome of this new precedent confirms very clearly that the legal form of the foreign investment fund is not a decisive factor in determining its comparability to Finnish entities.
In the SAC’s earlier case law (KHO:2015:9), a US closed-end investment fund in the form of a Delaware Statutory Trust was considered comparable to a Finnish listed investment company and not to an investment fund based on the characteristics of the US entity. The SAC’s newest precedent, however, further highlights the premise that emphasis should be placed on the operational and legal characteristics of the funds instead of their legal form when assessing the comparability of foreign and domestic investment funds.
The SAC’s new precedent and CJEU case law
The SAC’s new precedent is well aligned with the established case law of the Court of Justice of the European Union (“CJEU”) as well as with the tax praxis applied in Finland prior to 2020. The outcome of the SAC’s decision was expected after the CJEU handed down its ruling in case A SCPI (C-342/20).
The CJEU held in its decision that Section 20a of the ITA should be interpreted to mean that foreign corporate-based investment funds cannot be denied a tax-exempt status solely because the foreign fund is not a contract-based fund. The latest SAC precedent now extends the same principle to foreign trust-based investment funds.
Impact on the Finnish tax regime
The SAC’s new precedent has finally resolved the uncertainty involved in how foreign trust-based investment funds have been treated in Finnish taxation since the enactment of the new Section 20a of the ITA in 2020. This decision should make it clear that Finnish-source dividend payments to non-resident trust- or corporate-based investment funds cannot be subjected to disadvantageous tax treatment in Finland solely based on the fund’s legal form.
The SAC’s decision also confirms that the Finnish Tax Administration’s (“FTA”) recent tax practice is erroneous as it has not considered trust-based investment funds to be tax exempt under Section 20a of the ITA. Going forward, the FTA is expected to update its guidelines to allow the application of Section 20a of the ITA also in connection with trust-based investment funds.
We encourage foreign trust-based investment funds with withholding tax exposure in Finland to investigate in more detail as to whether they are entitled to apply for withholding tax refunds in Finland.
Borenius’ tax experts are available to assist in addressing any questions you may have regarding the SAC’s ruling.