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Finnish CFC Legislation and the Impact of Taxation for Multinationals
In April the Finnish Supreme Administrative Court (SAC) issued two interesting rulings concerning controlled foreign companies (CFC). In the first ruling the SAC reversed its own previous ruling, where it had held that the CFC legislation was applicable in a situation where a Finnish parent company had a Belgian subsidiary. The second ruling concerned a Singaporean subsidiary, which was not treated as a CFC in the taxation of a Finnish company in tax year 2009.
The basic idea of the CFC legislation is that a share in the income of a foreign company classified as a CFC can be considered as taxable income in the hands of a Finnish resident taxpayer, irrespective of whether that income has been factually distributed to the hands of that Finnish resident or not. Whether a foreign company is classified as a CFC may thus have a significant impact in Finnish taxation.
Taxand Finland looks at these rulings and explores the impact such rulings have on multinational companies.
The SAC reviewed its own judgement from 2002, where it had held that the Finland-Belgium double tax treaty did not prevent the application of the Finnish CFC legislation to a Finnish parent company with a Belgian subsidiary. In addition, the SAC held that the CFC rules did not amount to a restriction of the freedom of establishment or the free movement of capital.
After the original SAC ruling of 2002, the ECJ had ruled in the Cadbury Schweppes case in 2006 (C-196/04, Cadbury Schweppes plc and Cadbury Schweppes Overseas LTD) that companies or persons could not improperly or fraudulently take advantage of the Community law. However, the mere fact that a company has been established in a Member State for the purpose of benefiting from a more favourable legislation does not in itself suffice to constitute abuse of the freedom of establishment and does not deprive of the right to rely on Community law. The ECJ noted that the CFC legislation can constitute a restriction on the freedom of establishment if the actual establishment is intended to carry on genuine economic activities in the host Member State.
In the case at hand, the Belgian subsidiary was actually established in the host State and carried genuine economic activities in the same way as in the Cadbury Schweppes case. Relying on the Cadbury Schweppes case the Finnish parent company initiated proceedings for the reversal of the original and as such, legally final ruling from 2002. Due to the fact that the SAC had not referred the case to ECJ, the SAC found a procedural fault which could essentially have influenced the first ruling. Thus, the SAC reversed its own previous ruling.
The second case, concerned a specific situation where a Finnish company owned a Dutch subsidiary, which in turn owned a Singaporean holding company. There was a tax treaty in force between Finland and Singapore. Essentially, CFCs are defined as non-Finnish corporate bodies which are under the direct or indirect ownership or control of a Finnish tax resident and de facto liable to less than 3/5 of the corresponding Finnish level of income taxation. For double tax treaty countries, it is sufficient that the corporate income tax is not substantially lower in the other State, and that the company has not benefited from any special tax relief legislation. The income tax is considered to be substantially lower (when the case concerns countries located outside the EU) if the actual and total amount of the tax is on average less than 3/4 of the actual income tax paid by corporations in Finland. The Ministry of Finance issues a decree (a "black list"), of countries classified as such low-tax jurisdictions.
Due to certain legislative changes, the Ministry of Finance had neglected to issue a decree on black-listed countries going below the 3/4 limit for the year 2009. Despite the fact that the previous guidelines and the preparatory acts mentioned Singapore as a low-tax jurisdiction, the SAC felt compelled to rule in favour of the taxpayer. As a result, the Singaporean holding company could not be treated as a CFC for the tax year 2009. The message was that the taxpayers do not need to fear that companies established in other tax treaty countries than those especially black-listed would be considered as potential CFCs.
The two SAC cases show the challenges that multinational companies are confronted with and stress the importance of investigating the tax implications of subsidiaries established in different countries. Rules concerning CFCs can have a profound impact on the taxation of the parent company or the owner.
The first case emphasises the meaning of freedom of establishment and implies that the CFC legislation cannot be applied if the actual establishment of company is intended to carry on genuine economic activities.
The Government's incapability to issue decree in the second case was a severe deficiency as one of the main purposes of the legislative changes was explicitly to improve the clarity and predictability from the taxpayers' perspective. Accordingly, the CFC legislation could not be applied because the Government cannot escape its duties at taxpayers' expense.
Read the more on CFCs: UK Government Issues New Consultation on Controlled Foreign Companies Reform
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