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Important Court Ruling On CFC Legislation
The Finnish Supreme Administrative Court (SAC) recently gave a preliminary ruling which stated that a Singaporean subsidiary could not be treated as a controlled foreign company (CFC) in the taxation of a Finnish company in the tax year of 2009. Taxand Finland examines the details and the background of the ruling.
A CFC is defined as a non-Finnish corporate body which is 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.
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 actually been distributed to the hands of that Finnish resident or not. Whether a foreign company is classified as a CFC or not may thus have significant impact in Finnish taxation.
Prior to certain changes made in the Finnish CFC law (which took effect from 1 January 2009) partly outdated guidelines by the Finnish tax authority were applied. Singapore was specifically noted as a low-tax jurisdiction in such guidelines.
Despite the previous guidelines and the preparatory acts mentioning Singapore as a low-tax jurisdiction, the SAC felt compelled to rule in favour of the taxpayer. Due to the absence of a properly enacted "black-list" decree, the Singaporean holding company could not to be treated as a CFC in the tax year of 2009.
From 2010 onwards, the decree included the Arab Emirates, Barbados, Bosnia-Herzegovina, Georgia, Macedonia, Malaysia, Moldova, Montenegro, Serbia, Singapore, Switzerland and Uzbekistan as low-tax jurisdictions. In the future, the Ministry of Finance should regularly update the "black list" when tax treaties are concluded with new countries and when tax treaty countries make significant changes to their tax systems or tax rates. Estimating the level of taxation in other countries is not an easy task, and coming out of the black list might prove a fairly lengthy process.
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