Advocate General Opinion (CJEU C-342/20) – Finnish tax exemption criteria designed for contractual funds qualifies as a restriction on free movement of capita

On 6 October 2021, the Advocate General issued its opinion (Opinion) on Finnish CJEU case C-342/20 and stated that the Finnish tax exemption criteria designed only for contractual funds qualifies as a restriction on free movement of capital.

The case concerns the Finnish tax criteria for the exemption from WHT designed for collective investment schemes in contractual form (like Lux FCPs). The Finnish WHT reclaim in question was launched by a French fund in corporate legal form (a French real estate investment company SCSPI, société civile de placement immobilier à capital variable) for the WHT year 2020. The essence of the case is whether the corporate form fund must be treated comparable to a Finnish contractual fund notwithstanding its legal form.

The Finnish tax exemption criteria for investment funds were revised by a legislative change from the beginning of 2020. Pursuant to the in-force tax exemption criteria set out in section 20 a § of the Income Tax Act, only contractual investment funds can be regarded tax exempt in Finland. In the case at hand, the Finnish administrative court requests a preliminary ruling from the CJEU to determine whether the Finnish tax exemption criteria only applicable to contractual funds is discriminatory under the EU law.

The AG Opinion clearly states that a French open-ended corporate form investment fund should be considered comparable to a Finnish open-ended contractual investment fund for Finnish income tax purposes notwithstanding the difference in their legal form.

The AG Opinion is in line with the previous case law of the CJEU and follows established WHT related jurisprudence. Previously this year, the CJEU issued a ruling C-480/19 that assessed the taxation of a Finnish unitholder in a foreign corporate form fund. The CJEU ruled that the income received by a foreign corporate fund should not be treated differently from the income received by a Finnish contractual fund for Finnish income tax purposes, because the two fund types were in a comparable position despite their different legal forms.

It is expected that the upcoming ruling of the CJEU in the case C-342/20 may have a significant impact on the tax treatment of foreign investment funds not established in contractual form. The Finnish courts decided to postpone their decisions on several pending cases and wait for the CJEU to issue its ruling in the matter. Depending on the resolution of the CJEU, the Finnish tax legislation may need to be revised.

Changes to the Finnish interest deduction limitation rules

The Finnish Ministry of Finance issued a government proposal on changes to the Finnish interest deduction limitation rules. The changes proposed concern the balance sheet exemption, the exemption on infrastructure projects and the right to deduct net interest expenses belonging to the income basket of other income. The proposed changes would tighten the scope of the Finnish interest deduction rules.

Balance sheet exemption

The current interest deduction rules include a balance sheet exemption. The deduction limitations are not applied if the company provides a clarification that the ratio of the company’s equity in the confirmed financial statements is higher or equal to the corresponding ratio in the consolidated group level balance sheet at the end of the tax year.

Conditions for the balance sheet exemption are now planned to be tightened. The aim of the changes is to limit the possibility to transfer income outside Finland’s taxing territory by using the balance sheet exemption in capital investment structures and other corresponding structures. The possibility to use the balance sheet exemption would be limited in situations, where a party owning a significant stake in the company has financed the company. In these situations, the group balance used for the basis of the balance sheet exemption would be adjusted so that the shareholder loan would be considered as equity capital. Ownership of 10% would be considered as a significant ownership. The law would also require that the taxpayer’s financial statements and consolidated financial statements, which are used as a basis for the balance sheet exemption, should be audited.

Other changes proposed

The interest deduction changes concerning infrastructure projects and the other income basket can be summarized as follows.

• The government proposal includes a proposal to broaden the scope of the current exemption on infrastructure projects so that the exemption will also cover public infrastructure entities. In the future, the interest deduction limitation rules would not be applied to public infrastructure entities that are responsible for the execution or maintenance of infrastructure.
• Companies covered by the infrastructure exemption would be allowed to deduct net interest expenses incurred before 2020 in 2020 – 2022.
• The proposal also includes a clarification to the deduction rights of entities from which the income basket of other income was removed as a result of the income tax basket reform that came into effect at the beginning of 2020. It is proposed that these entities may in the future deduct from their business income the non-deductible net interest expenses accrued in the other income basket during the tax year 2019.

The law is intended to come into effect on 1 January 2022. The changes to the balance sheet exemption would apply to the 2022 taxation for the first time. Changes in the infrastructure exemption and to the deduction right of non-deductible net interest expenses of the other income basket would be applied retroactively already for the tax year 2020.

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

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