Legal Alerts/31 Oct 2023

A Genuine Establishment? – A New Central Tax Board Ruling on CFC Status and Sufficient Economic Substance

Borenius assisted a Finnish taxpayer in an advance tax ruling process before the Central Tax Board (the “CTB”). The CTB ruled in favour of our client (CTB 2023/41) in a case where an income tax exempt Luxembourgian private wealth management company (“SPF”) owned by the said taxpayer was not deemed to constitute a controlled foreign company (“CFC”) under the economic substance exemption.

Matters related to CFCs, and especially the relevant substance requirements, have been subject to considerable uncertainty since the CJEU’s judgement in Cadbury Schweppes (C-196/04) and the subsequent amendments made to the CFC legislation. The CTB issued several rulings on different CFC matters on the same day, and more are to come.

Background of the case

In the case involving our client, the taxpayer – a Finnish resident private investment company – established a limited liability company in Luxembourg for the management of family wealth in late 2021. The company meets the conditions of the special Luxembourg private wealth management company regime (SPF) and is thus not subject to income tax in Luxembourg. The Finnish company owns the majority of the shares in the company, which means that the company would generally be considered a CFC for Finnish tax purposes unless the economic substance exemption applies.

The Luxembourgian company has rented office premises and installed a full-time chief investment officer and a part-time office manager in Luxembourg. The chief investment officer has independent authority to make investment decisions regarding the company’s active investment portfolio within the limits of the company’s investment policy, which has been adopted by the board.

In addition to the active investment portfolio, the company has established a strategic long-term investment over which the chief investment officer has no authority and which solely generates income that is used for other investments. The company may also use external service providers where necessary, but the final investment decisions are always made by the company’s chief investment officer, and the company is not dependent on these external advisors.

Although the company was established in 2021, it only began actively engaging in investment activities by its own staff when the chief investment officer was hired in the spring of 2023. Before that, the investment portfolio was outsourced to an external service provider while the company worked on establishing its operations and hiring the required staff.

The CTB’s ruling on the existence of a genuine establishment in Luxembourg

The CTB held that the Luxembourgian company is genuinely established in Luxembourg and that it carries out economic activity there with sufficient equipment, assets, and employees with authority and capabilities to decide on the company’s daily operations. As such, the conditions for the economic substance exemption were fulfilled, and the Luxembourgian company was not considered a CFC.

Although the company’s actual operations only began in 2023, the economic substance exemption was ruled to have applied already in 2022 as the company had engaged in preparatory activities with the genuine goal of starting its actual operations.

Key takeaways

The ruling confirmed a few important matters that have been subject to uncertainty especially since early 2022 when the Supreme Administrative Court overturned the positive advance rulings issued by the Finnish Tax Administration with regard to Luxembourgian SPFs.

  • Investment activities can be considered as “economic activity”.
  • The sufficiency of a foreign company’s assets and employees is assessed specifically based on the company’s activities, which may require only a limited amount of assets or employees.
  • Activities carried out in preparation of starting the actual economic activity qualify the company for the economic substance exemption when the company has sufficient assets and employees required specifically for carrying out the preparatory activities.
  • Finally, the ruling provides guidance on what type of economic substance may be required from an investment company.

Although the CTB’s ruling concerning our client is not yet final as the Tax Recipients’ Legal Services Unit may lodge an appeal against it at the Supreme Administrative Court, this ruling is nevertheless an important step forward that will have certain implications for CFCs and simplify the playing field.

We will continue to monitor for developments in this matter. Borenius’ tax experts are available to answer any questions you may have regarding the CTB’s ruling.

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Additional information

Einari Karhu



Mikko Vesikivi

Senior Associate