Finnish investment fund tax exemption regime contains a restriction on free movement of capital

Advocate General’s opinion in Case C-342/20

Advocate General’s opinion in Case C-342/20

Advocate General’s opinion in Case C-342/20, Veronsaajien oikeudenvalvontayksikkö (Exonération des fonds d’investissement contractuels).

Essence of the opinion

The pending case concerns the tax treatment of a French corporate form fund in Finland. According to the Advocate General Henrik Saugmandsgaard Øe, the Finnish investment fund tax exemption regime designed for contractual based funds contains a restriction on free movement of capital. A French open-ended corporate form investment fund should be treated similarly as a Finnish open-ended contractual based investment fund for Finnish income tax purposes notwithstanding the difference in the legal form. The funds are in a comparable position and the different tax treatment cannot be justified by an overriding reason in the public interest. 

KPMG Finland comment

The opinion is a logical extension to the earlier 2021 judgment of the Court of Justice of the EU (CJEU) in C-480/19 which concerned the taxation of a Finnish unitholder in a foreign corporate form fund. In the earlier judgment, the CJEU held that the income received from a foreign corporate form fund should not be treated differently from the income received from Finnish contractual based fund for Finnish income tax purposes, because the funds were in a comparable position despite their legal forms. The fresh Advocate General’s opinion extents this jurisprudence directly to the Finnish fund level tax practice which has not thus far treated similarly contractual and corporate form funds: most corporate form funds, especially European SICAVs have not been held comparable with Finnish contractual funds and thus entitled to full withholding tax refunds. 

The Advocate General’s opinion contains also important comments relating to the comparability assessment in general: it is not acceptable to base a tax exemption regime on such criteria that are natural for resident funds to meet. Such criteria are arbitrary and form indirect discrimination.

It is anticipated that the CJEU will deliver its judgment around the end of 2021 and we expect the CJEU to adopt similar approach as the Advocate General. Non-resident corporate form funds are encouraged to continue filing EU law based withholding tax reclaims in Finland, appeals against the Finnish Tax Administration’s rejections and take appropriate steps to secure the entitlement to full withholding tax refunds.

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