Finland: Luxembourg SCS fund comparable under EU law to Finnish contractual-based special investment fund
Administrative Court decision
The Administrative Court held that a Luxembourg SCS fund resembled under EU law a Finnish tax-exempt contractual-based special investment fund that is a corporation for Finnish tax purposes.
Summary
The SCS fund had a general partner and a Finnish investor as one of its limited partners. The fund, which was considered an alternative investment fund (AIF), had 36 investors and was regulated under the Luxembourg specialized investment funds (SIF) regime. The issue before the court was how a distribution made by the SCS fund was taxed in the hands of the Finnish investor. The key question was whether the SCS fund was comparable under EU law to a partnership for Finnish tax purposes, in which case an allocable partnership stake would taxed to the Finnish investor irrespective of actual distribution, or whether the fund was comparable to a corporation, more specifically to a Finnish tax-exempt contractual-based special investment fund, in which case only actual distributions would be taxable income for the Finnish investor.
The Administrative Court cited the CJEU’s judgment in A SCPI (C-342/20), the CJEU’s generally settled case law, the nature of investment activity, the number of investors, and the SCS fund’s AIF status as the determinative factors in its conclusion that the SCS fund was comparable under EU law to a Finnish tax-exempt contractual-based special investment fund and thus only actual distributions of the SCS fund could constitute taxable income for the Finnish investor.
KPMG observation
The Administrative Court’s decision is a landmark decision in Finland. For the first time a foreign partnership was held comparable under EU law to a Finnish tax-exempt contractual-based special investment fund that is a corporation (and not a partnership) for Finnish tax purposes. The outcome is not relevant solely at the investor level, but also for partnership-level taxation. As a result of the decision, a foreign partnership may be eligible to claim EU-law based tax benefits in Finland. More specifically, a foreign partnership may be entitled to tax-exempt Finnish-sourced dividend income, as well as rental income and capital gain income from real estate investments. Foreign partnerships and their managers thus need to review their tax position in Finland.
For more information, contact a KPMG professional in Finland:
Aki Kokko | aki.kokko@kpmg.fi