Insights

Finland: Ruling provides clarity on CFC status and economic substance exemption

Einari Karhu 03 Nov 2023

An analysis by Borenius, Taxand Finland

In a recent case heard by the Central Tax Board (CTB), a Finnish taxpayer received a favourable ruling regarding the controlled foreign company (CFC) status of their Luxembourg private wealth management company (SPF).

The Finnish company’s Luxembourg SPF, established to manage family wealth, met the criteria for the SPF regime and was exempt from income tax in Luxembourg. Moreover, it owned the majority of its shares, potentially classifying it as a CFC for Finnish tax purposes.

The decision is significant, providing clarity on a number of economic substance requirements for investment companies that have been subject to uncertainty:

• The CTB determined that investment activities could be considered “economic activity.”
• The CTB emphasised that the assessment of a foreign company’s assets and employees is based on the specific activities it conducts. A company may require a limited number of assets and employees for its operations.
• The ruling stated that activities carried out in preparation for starting actual economic activity could qualify for the economic substance exemption if the company had the necessary assets and employees for the preparatory activities.
• The ruling provided guidance on the type of economic substance that may be required from an investment company.

Einari Karhu and Mikko Vesikivi of our Finnish firm, Borenius, analyse this case and its implications in more detail here.

Article tags

Finland | Luxembourg | Tax | Tax Law