Executive summary

On 6 August 2018, the Finnish Ministry of Finance issued a draft bill and a request for comments regarding proposed amendments to the Finnish controlled foreign company (CFC) rules. The draft bill was prepared to implement the European Union Anti-Tax Avoidance Directive (the ATAD) CFC provisions. According to the draft bill, the new rules would enter into force as of 1 January 2019 and would be applied for the first time for the 2019 tax assessment.

The draft bill discusses also the need to amend the domestic general anti-abuse rule (GAAR). However, the draft bill concludes that the current GAAR provision is sufficient to fulfill the objectives of the ATAD. Consequently, no changes are proposed to the domestic GAAR provision.

Detailed discussion

Proposed changes to the CFC rules

The purpose of the CFC legislation is to prevent the transfer of taxable income to low-tax countries. Under current rules, as a general rule, a company may be considered as a CFC if the company is controlled by Finnish resident taxpayers and if the foreign company's effective tax rate in its country of residence is less than three-fifths of the Finnish corporate income tax rate (i.e., less than 12 %), unless a specified exemption applies. The draft bill would introduce changes to the CFC definition and the applicable exemptions, including the following:

• The threshold of control for an entity to qualify as a CFC is lowered from the current 50% (direct or indirect ownership) to 25% (25% ownership of share capital or voting rights, or entitlement to 25% of profits, definition based on the ATAD).
• Contrary to current rules, only the ownership of related parties is taken into account when assessing whether control exists. However, the ownership of both the Finnish resident as well as nonresident parties would be taken into account.
• The ownership threshold contained in the current rules for including the CFC's income in to the Finnish resident's taxable income would be abolished.
• The current exemption for companies in non-blacklisted tax treaty countries are removed.
• The proposal contains an amendment concerning the taxation of gains from the sale of shares in a CFC, according to which the income taxed as CFC income in the hands of the taxpayer during previous years could be taken into account when determining tax consequences of the taxable disposal.

The draft bill does not differentiate between active and passive income as proposed in the ATAD. The rules concerning the calculation of CFC income also remain mostly unchanged. However, several technical changes are introduced for the purposes of alignment with the ATAD provisions.

Amended exemptions for considering an entity to be a CFC

Under the proposed rules, a foreign company resident in a European Economic Area (EEA) country is not considered a CFC if it is genuinely established in the jurisdiction of its tax residence and if it carries out significant genuine economic activities in that jurisdiction involving personnel, equipment, assets and premises. Also, companies with tax residence in a jurisdiction outside the EEA will fall within the scope of the exemption if, in addition to the above:

1. The jurisdiction of residence is not at the end of the tax year in question and the previous tax year included in the list of non-cooperative jurisdictions as issued by the Council of the European Union.
2. There is sufficient basis for exchange of information between Finland and the jurisdiction of residence.
3. The company's income mostly results from activities specified in the legislation carried out in the jurisdiction of residence (industrial production or other comparable production activity, shipping activities or sales/marketing activities that directly benefit the aforementioned activities).

Implications

Under the proposed rules, the control threshold determining the CFC status would be lowered from 50% to 25% and also nonresident related parties would be taken into account in assessing the threshold, which could bring additional entities within the scope of the CFC provisions.

The proposed exemption concerning the EEA countries does not entail significant changes to the current rules. However, for non-EEA countries, the exemption introduces new requirements, which implies additional conditions for exemption from the scope of the CFC rules for entities in non-EEA treaty countries in comparison to the earlier rules. The additional requirement regarding the scope of activities may bring several new entities to the scope of the provisions.

Comments on the draft bill must be submitted by 27 August 2018 after which the Ministry of Finance will finalize the Government bill to be submitted to the Parliament.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Oy, Helsinki

• Kennet Pettersson
  kennet.pettersson@fi.ey.com
• Laura Lahdenperä
  laura.lahdenpera@fi.ey.com

Ernst & Young LLP, Nordic Tax Desk, New York

• Antoine Van Horen
  antoine.vanhoren@ey.com
• Nicole Maser
  nicole.maser1@ey.com
• Laura Lahdenpera
  laura.lahdenpera@ey.com (through December 2018)

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ATTACHMENT

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