By Sami Tuominen (Partner, Head of Tax, Bird & Bird, Finland) & Marianna Santamala (Associate, Bird & Bird, Finland)
The Finnish Ministry of Finance recently proposed amendments to the current Finnish legislation concerning controlled foreign corporations (CFC). On August 6, 2018, the Finance Ministry submitted a proposal for Government Bill on the amendments to the Act on taxation of members of controlled foreign companies (Act). The Act is currently going through a consultation round and the Ministry would accept input until the end of this month. The purpose of the Act is to prevent the avoidance of taxation in Finland by utilizing corporations established in states with low taxation.
A CFC is a company or other entity located in a country where the level of taxation is significantly lower than in Finland. The Act applies if a CFC is in the control of a taxpayer in Finland. The Act may be applied to individuals as well as legal persons. Under the Act, the income of a foreign entity may be taxed as the income of a Finnish shareholder even if the foreign entity does not, for example, distribute any dividend.
Current CFC rules and proposed changes
The proposed amendments mainly base on the Council Directive (EU) 2016/1164 laying down rules targeting tax avoidance practices that directly affect the functioning of the internal market (Anti-Avoidance Directive). The proposed changes inter alia relate to the definition of a CFC and the exceptions in its applicability. Moreover, the proposed amendments also concern the requirements of required ownership level and the calculation methods based on which it would be decided if the rules could be applied or not.
The Government Bill proposes changes to the applicability of the CFC rules regarding entities located outside the European Economic Area (EEA). According to the draft Bill, the applicability of the CFC Act would be unanimously assessed for entities located outside the EEA. Entities located outside the EEA could be exempted from the applicability of the Act if the level of taxation in these countries is at least 3/5 of the Finnish level. Moreover, the entities are required to carry out activities defined in the CFC Act and the country shall also have an agreement on tax information change with Finland.
Currently, the Act is not applied to foreign entities engaged in certain fields of business, for example, in industrial production. Moreover, exemption is applied also to entities located in certain tax treaty countries outside the so called “grey list,” which includes certain tax treaty countries with too low taxation. These exemptions are proposed to be abolished from the Act.
Currently, the application of the Act requires that one or more Finnish tax resident entities or individuals directly or indirectly hold at least 50 percent of the capital or votes of a CFC or have the right to at least 50 percent of the profit of the CFC. In addition to the control requirement, a separate minimum ownership requirement of 25 percent is applied.
It is proposed that the current control requirement would be reduced to 25 percent. The control threshold may also be met when the proportion of dependent tax residents’ and non-tax residents’ amount of control is added up. In addition, the minimum ownership requirement is proposed to be abolished.
The purpose of the CFC legislation is to prevent channeling of income by CFC’s located in countries with low taxation. The new CFC rules are not, as such, expected to increase tax revenue. It is expected that the amendments may increase the administrative burden of the taxpayers, for example, when the amount of control in foreign entities is assessed. As a result of the proposed amendments, national regulation regarding CFC’s is expanded to cover several new foreign entities because of the proposed changes to the current exemption rules as well as the reducing of the thresholds.