We advised the Finnish Venture Capital Association in connection with a change in tax legislation regarding foreign investment funds. The Government has recently proposed that the current tax regime, which governs foreign limited partners (LP) in Finnish private equity and venture capital funds, is amended in order to attract further investments from foreign funds. The current tax legislation requires that foreign LPs are treated as tax treaty subjects in their home countries in order to avoid the creation of a permanent establishment (PE) in Finland when investing in a Finnish limited partnership. In practice, this has limited the number of foreign investors and funds of funds that have been willing to invest into Finnish funds.
The new rules consist of two separate regimes under which foreign LPs are able to invest into Finnish private equity and venture capital funds without PE in Finland:
1) Foreign LPs that are non-transparent for tax purposes will continue to be eligible under the existing regime. The tax treaty residence requirement remains. An additional requirement will be introduced, according to which the Finnish target fund must be an alternative investment fund as meant in the AIFMD.
2) In addition, foreign LPs which are transparent for tax purposes would be eligible under the following criteria:
- the foreign investor or fund becoming an LP in the Finnish fund must be established or registered in a country having an information exchange agreement for tax purposes with Finland (no income tax treaty required here, meaning that also funds registered in offshore locations having an information exchange agreement with Finland are eligible);
- the foreign fund must be comparable to a Finnish limited partnership for tax purposes (this requirement should cover the majority of international limited-partnership-type fund structures);
- the ultimate beneficial owner, e.g. the investor of the foreign fund of funds, must be resident in a state having a tax treaty with Finland (this requirement is applied separately for each ultimate investor in the structure); and
- the Finnish target fund must be an alternative investment fund as meant in the AIFMD.
This change, proposed to come into force in fiscal year 2019, should bring a large number of foreign funds, including fiscally transparent funds of funds, into the scope of the relief, and facilitate the fundraising by Finnish private equity and venture capital firms.
Our assistance included drafting background material for the legislative process and supporting the FVCA in several discussions with the Ministry of Finance and with various stakeholders in the private sector.