By Mika Ohtonen (Head of Tax, Roschier, Finland) & Laura Puro (Senior Associate, Roschier, Finland)
Finland’s Ministry of Finance last month published a draft proposal on amending the Finnish controlled foreign corporation (CFC) statute. While the purpose of the draft is to implement the CFC provisions of the Anti-Tax Avoidance Directive (ATAD), the proposed changes are materially stricter than required by the ATAD.
The proposed amendments would become effective as of 2019. The key amendments can be summarized as follows.
The ATAD requires member states to treat foreign corporations as CFCs if their actual income tax burden in their state of residence is less than 50 percent of the tax burden that would be charged on the same income by the member state. The current Finnish CFC statute applies a higher threshold of 60 percent and the proposal does not amend this threshold.
Under the current CFC regime, a corporation resident in the EEA or non-blacklisted tax treaty country, is generally not a CFC unless the corporation benefits from targeted tax incentive and does not carry on a substantive economic activity in its country of residence. The draft limits these exemptions materially.
Going forward a corporation resident in the EEA would be a CFC only if it does not carry on a substantive economic activity in its country of residence.
Stern rules for corporations resident outside EEA
Materially stricter rules would apply to corporations resident outside the EEA. They would have to meet three additional criteria to be exempted: the corporation does not reside in a country the EU considers “non-cooperative;” adequate exchange of information is in place with the country of residence of the corporation; and the corporation carries out manufacturing activities, certain other comparable activities, or sales and marketing activities related to manufacturing or comparable activities.
Strict control requirements
The draft includes very strict control requirements. Currently, a corporation is a CFC only if Finnish residents own at least 50 percent of the corporation. Further, only a shareholder who owns (together with related parties) at least 25 percent of the corporation is taxable for CFC income. The draft replaces these two criteria with a single requirement: a corporation is a CFC, and a shareholder is liable for tax, if the shareholder, together with related parties, owns more than 25 percent of the corporation. Again, this is stricter than required by the ATAD, where the threshold is 50 percent.
Further, the draft lowers the ownership threshold used to define related party status. Currently related party status requires a 50 percent ownership interest. Under the proposal, the required ownership limit would be 25 percent.
Unlike the ATAD, which only treats certain items of income earned by a CFC as taxable CFC income (either listed categories of passive income or income from non-genuine arrangements), Finland would continue to tax all income of a CFC as CFC income.
Finland only treat taxes paid by the CFC as creditable against the CFC income. For example, withholding tax levied on dividend paid by the CFC is not creditable. Further, potential tax paid on the same CFC income to another country in case of chain-ownership is not creditable.
The Ministry of Finance will likely introduce the final Government proposal to the Finnish Parliament later this fall. If implemented in its current form, the Finnish CFC regime would expand fundamentally and result in increased uncertainty and administrative costs for taxpayers. The lower control and related-party thresholds together with the more limited exemptions are likely to bring more corporations and many smaller ownership interests under the scope of the CFC regime.