Opinion: Advocate General of the CJEU Finds Finnish Tax Exemption for Contractual Investment Funds Contrary to EU Law

CJEU Advocate General Issues Opinion on Finnish Tax Exemption Relating to Investment Funds

On 6 October 2021, the Advocate General of the Court of Justice of the European Union (CJEU) issued an opinion on case C-342/20 Veronsaajien oikeudenvalvontayksikkö (Exonération des fonds d’investissement contractuels) pertaining to Finland’s tax-exemption regime for contractual investment funds. The Advocate General concluded that this regime contains a restriction on the free movement of capital.

The opinion of the Advocate General follows an earlier judgment by the CJEU on 9 April 2021 in case C-480/19 which held that the income received from a foreign corporate-form fund should not be treated differently from the income received from a Finnish contractual-based fund for Finnish tax purposes because the funds were in a comparable position, despite their different legal forms. 

The request for a preliminary ruling from the CJEU was made by the Administrative Court of Helsinki (Helsingin hallinto-oikeus) pursuant to proceedings between the applicant, A SCPI, a French-resident investment fund, and the Finnish Tax Authority (Verohallinto). The present request has been made to determine whether the newly enacted §20a of the Finnish Income Tax Act (Tuloverolaki) is contrary to Articles 49, 63 and 65 of the Treaty on the Functioning of the European Union (TFEU) as in terms of these legislative provisions, only non-resident open-ended investment funds formed by contract are treated in the same way as a Finnish investment fund exempt from income tax, which excludes an investment fund such as A SCPI that has the legal form of a company.

The CJEU’s judgment in this matter is yet to be handed down and it is anticipated that the CJEU will deliver its judgment towards the end of 2021.

Finland’s Tax Exemption Regime for Investment Funds

Before 1 January 2020, the Finnish income tax legislation did not contain a specific definition of an “investment fund” and, as such the eligibility of a foreign investment fund to qualify for exemption from withholding taxes was assessed on a case-by-case basis by the Finnish Tax Authority, based on the comparableness to a Finnish-resident fund.  

Effective 1 January 2020, new legislation came into force in Finland. The new legislation specifies the conditions under which an investment fund or a special investment fund is considered exempt from income tax in Finland. Under §20a of the Income Tax Act, a contractual foreign open-ended investment fund with variable capital that has at least 30 unitholders, is exempt from income tax.

The Advocate General’s Opinion Identifies a Restriction on the Free Movement of Capital

The Applicant, A SCPI, is an investment fund incorporated under the laws of France which takes the form of a company with variable capital (Société Civile de Placement Immobilier à Capital Variable). A SCPI is transparent for tax purposes in France despite its corporate nature and is not liable to pay any income tax at the fund level. Instead, the investors are liable to tax on their portion of the income distributed by the fund and for profits gained on the sale or redemption of their shares.  

The Finnish Tax Administration considered A SCPI as an investment company with variable capital, and therefore did not have the legal form of a special investment fund, constituted by contract, as required by §20a of the Income Tax Law.

The Applicant took the matter on appeal to the Administrative Court of Helsinki. The Court referred the case to the CJEU for a preliminary ruling.

The Advocate General opined “there is no doubt that the requirement to take the form of a contract to benefit from fiscal transparency, such as that provided for in §20a of the Law on Income Tax, constitutes a restriction on the free movement of capital. Indeed, that requirement is likely to deter investment funds established in other Member States in the statutory form from making investments in Finland.”

The Advocate General opines that limiting itself to a formalistic interpretation of “transparency” by placing strict emphasis on the requirement “formation by contract”, §20a of the Finnish Income Tax Act excludes certain corporate-form investment funds which are, in practice, as “transparent” as investment funds constituted by contract. As a result, §20a leads to an arbitrary difference in treatment of investment funds which are in essence comparable. 

Lastly, the Advocate General pointed out that his reasoning is supported by the recent judgment concerning Luxembourg UCITS in case C-480/19. While the recent judgment only addressed the tax treatment of income distributed by UCITS funds and not the tax regime applicable to investment funds, the principle laid down by this precedent is clear: income received from a foreign corporate-form fund is not to be treated differently from the income received from a Finnish contractual-based fund for Finnish income tax purposes, provided that the funds are comparable.

The Impact on Future WHT Claims from Finland

It is important to note that the opinion of the Advocate General is not binding on the CJEU and its purpose is simply to offer the CJEU a legal solution to the case at hand. The judgment in case C-342/20 will be handed down at a later stage, which is expected towards the end of 2021.

Should the CJEU agree with the Advocate General’s opinion as anticipated, this may create an opportunity for foreign corporate-form investment funds to become entitled to full withholding tax refunds. This is especially relevant to European SICAVs which have previously not been considered comparable with Finnish contractual funds and therefore not entitled to the exemption from withholding tax. 

How to Secure an Exemption from Finnish Withholding Tax

WTax encourages foreign corporate-form investment funds to file protective claims for refunds of the full withholding tax withheld in Finland. 

WTax assists both EU and non-EU clients in filing EU law-based withholding tax reclaims (“ECJ claims”) in Finland, and will appeal the Finnish Tax Administration’s rejections and take appropriate steps to secure the entitlement to full withholding tax refunds in line with these recent court decisions.

Please get in touch with WTax’s regional specialists to find out more about how we can improve your investment performance.

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