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Sari Laaksonen |
On June 6 2008, the Finnish government issued a bill to amend the controlled foreign companies (CFC) leg-islation. The amendments were ratified by the Finnish president on November 7 2008. The amendments narrow the scope of application of CFC legislation, and could also require reorganisation of company structures.
According to the bill, there will be amendments to the definition of a CFC entity, to the provisions concerning the determination of the amount of taxable CFC income, deduction of the losses of a CFC entity and foreign tax credit.
According to the bill, CFC legislation would not apply if:
the entity is resident in a member state of the European Economic Area or in a tax treaty partner state; and
the controlled entity is actually established in the host state and, objectively, carries out genuine economic activities there.
Exceptions apply to entities that are established in countries that either are on the black list provided by the ministry of finance or do not exchange appropriate information with the Finnish tax authorities.
An entity that resides in a state with which Finland has a tax treaty would not fall under the scope of application of the CFC regime if:
the tax burden under the general corporate tax system of that state is comparable to the corporate tax burden in Finland; and
the entity has not been subject to a special tax benefit in its state of residence.
If the two requirements are met, an entity in a tax treaty state is excluded from the scope of the CFC regime. However, general anti-abuse rules apply.
In addition, according to the bill, foreign permanent establishments in low tax jurisdictions are considered comparable to foreign legal entities. Thus, in some cases a permanent establishment of a foreign subsidiary could be regarded as a CFC entity even though the subsidiary itself would not meet the requirements for CFC status.
New CFC legislation will increase the interest level of individual shareholders from 10% to 25% so no CFC taxation would occur if the interest does not exceed 25%. The right to deduct the losses of a CFC will increase from five to ten tax years following the loss year. The share of the losses of a CFC cannot be deducted from any income other than future CFC income.
The new CFC legislation still leaves some issues, such as the determination of genuine economic activities and exceptions to some fields of activities open to interpretations.
According to the bill, a company carries on genuine economic activities if the company has adequate premises, equipment, and independent personnel in its home state. However, intra-group holding companies or financing companies, for example, do not normally require significant, constant presence. Thus, the situation will still be somewhat unclear, and holding structures must be considered and argued more carefully.
CFC legislation does not apply to profits that arise mostly from industrial production, other comparable production, or shipping business conducted in the entity's state of residence. The practice concerning granting line of business exemptions has become obsolete. No amendments were presented, however, even though there is a need for reform.
New CFC legislation is generally effective for fiscal years commencing on or after January 1 2009. However, there is a transitional period lasting until 2015 for permanent establishments already formed on December 31 2007 or before.
The amendments could affect the acceptable structures of Finnish-owned foreign entities. The need for restructuring should be considered to assure compliance with the new requirements.
Sari Laaksonen, (sari.laaksonen@castren.fi)
