Executive summary

Finland’s Ministry of Finance has issued a government bill (the Bill) on amendments to the Finnish controlled foreign company (CFC) rules. The Bill was issued to implement the European Union (EU) Anti-Tax Avoidance Directive (the ATAD) CFC provisions and was submitted to the Finnish Parliament on 1 November 2018 following the issuance of a draft bill for public comment.¹ According to the Bill, the new rules would enter into force as of 1 January 2019 and would be applied for the first time in the 2019 tax assessment.

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, in general, 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. If a foreign entity qualifies as a CFC, the income may be taxable in Finland in the hands of the resident shareholder.

The 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 related resident and 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 would be removed and replaced by a new exemption provision discussed further below.
• The Bill 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 CFC rules will also be applicable to taxpayers subject to limited tax liability, if the CFC income relates to the taxpayer’s PE in Finland.

The 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 is not considered a CFC if it is genuinely established in the jurisdiction of its tax residence and if it carries out genuine economic activities in that jurisdiction. The description of genuine economic activities remains largely in line with the description currently applicable to European Economic Area (EEA) resident entities. However, in addition to the conditions related to the genuine establishment in terms of personnel, premises and assets, companies tax resident in a jurisdiction outside the EEA will fall within the scope of the exemption only if the following conditions are fulfilled:

1. The company’s income mostly arises from industrial or other comparable production activities, shipping activities or sales and marketing activities related to such activities. Contrary to the draft bill, productive service activities are also included in the scope of the exemption.
2. There is sufficient basis for exchange of information between Finland and the jurisdiction of residence and the exchange of information with the jurisdiction is in fact fulfilled.
3. The jurisdiction of residence is not at the end of the tax year in question and in the previous tax year included in the list of non-cooperative jurisdictions as issued by the Council of the EU.

Implications

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

The proposed exemption on the basis of genuine economic activities does not entail significant changes to the current rules for EEA companies. However, for non-EEA treaty countries, the exemption introduces new requirements, which implies additional conditions in terms of the genuine economic activities provision for exemption from the scope of the CFC rules for entities in non-EEA treaty countries in order to not be considered as CFCs.

Endnote

1. See EY Global Tax Alert, Finland issues draft bill for public consultation regarding changes to CFC rules, dated 17 August 2018.

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

ATTACHMENT