Finland: Government Budget Proposal – Supreme Administrative Court on taxation of carried interest

The Finnish Government has agreed on new tax measures, which aim to strengthen general government finances by a total of approximately EUR 100 million on an annual basis. The new decisions will come into force in 2022 and 2023. The Government has published a short description of the planned tax changes. Further information and details of the changes will be specified during their preparation.

The planned tax changes include for example the following:

• Gains derived from the real estate investments of foreign funds will be taxed in Finland as broadly as possible from the beginning of 2023. One aim of the planned change is to make sure that Finland has the right to tax capital gains from real estate also in situations where the disposed entity is an entity that owns real estate indirectly.
• The transfer pricing adjustment provision will be revised from the beginning of 2022 so that it can be applied within the scope of the OECD Transfer Pricing Guidelines.
• The provisions on the limitation of deductibility of interest expenses will be reformed by restricting the application of the balance sheet exemption from the beginning of 2022. The aim is to amend the legislation so that the provisions prevent the transfer of taxable income outside Finnish taxation in private equity structures.
• The capital gains tax for natural persons will be broadened in situations where natural persons move abroad. The changes will take effect at the beginning of 2023.

The proposed changes raise a large amount of open questions and they have already raised public debate in Finland. The planned tax changes will be further clarified and determined as the handling of the Government budget proposal proceeds. However, it is expected that the changes, including the proposed exit tax in particular, will cause difficulties when they are implemented in practice. The Government will debate the budget proposal on 23 September 2021 after which the Government proposal for the 2022 budget will be published.

The Supreme Administrative Court issued clarifying decisions on taxation of carried interest

In decisions issued on 11 May 2021, the Supreme Administrative Court dismissed the Tax Recipients’ Legal Services Unit’s appeal in a dispute concerning the question whether carried interest must be deemed capital income in accordance with the civil law form or as earned income subject to WHT.

Castrén & Snellman Attorneys assisted ICECAPITAL’s real estate private equity funds and the owner-entrepreneurs behind them in the said tax dispute in which the Finnish Tax Administration sought to tax dividends received by the owner-entrepreneurs as earned income. In principle, the Tax Administration argued that part of the income of the companies took the form of carried interest from the funds.

The taxpayers’ view was that the only correct interpretation under the regulation in force and the legislative materials is to state that carried interest must also be taxed according to the civil law form as capital income. The Finnish Tax Administration and later the Tax Recipients’ Legal Services Unit had disregarded the civil law form and taken the position that carried interest in particular was earned income subject to WHT and possibly constituted tax evasion.

The Helsinki Administrative Court decided the matter to the benefit of the taxpayers in its decision of 12 January 2021. The Helsinki Administrative Court respected the civil law form used. The Helsinki Administrative Court held that carried interest accrued taxable capital income for the entrepreneurs, not earned income. The court also found that the general tax avoidance provision did not apply to the matters.

The Supreme Administrative Court upheld the Helsinki Administrative Court’s decisions, which are now final. The Supreme Administrative Court confirmed the taxpayers’ understanding that respect for the civil law form also applies to carried interest. The result corresponds to prior decisions issued by the Administrative Court and the Central Tax Board.

The result indicates the weight that must be given to the civil law form and further clarifies the legal state surrounding the issue. The decision is significant to the entire private equity investment field. Hopefully, this decision along with prior decisions finally closes the long-running debate surrounding the matter. Owner-entrepreneurship must continue to be permitted in the private equity field without significant ambiguity in taxation.

If you wish to discuss these topics, please contact: Castrén & Snellman, Helsinki

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