Supreme Administrative Court clarifies CFC status of investment funds in two landmark tax rulings

Insights|March 18, 2025

On 15 January 2025, the Finnish Supreme Administrative Court kicked off the year from a tax perspective by issuing one published and one unpublished, yet significant ruling, on exempting investment funds from the Finnish controlled foreign company (CFC) rules. Furthermore, the Court published a ruling clarifying elimination of double taxation in fund structures involving CFCs.

Foreign investment funds can be exempted from tax in Finland if they are comparable to Finnish investment funds. However, many tailored funds offered to professional investors do not qualify for tax exemption in Finland and yet are still tax exempt or low-taxed in their home jurisdiction. This makes them vulnerable to Finnish CFCs rules for any significant Finnish investors.

If a foreign investment fund is deemed to be a CFC from a Finnish tax perspective, any income on investments received by the fund will be taxed as income of the investor as if they received it directly. This nullifies the fundamental principle of investment fund taxation, which is that the return of the fund is not taxed until the investor cashes out, allowing the untaxed capital invested in the fund to grow on an interest-on-interest basis.

An investment fund may in some cases benefit from the economic substance exemption of the Finnish CFC Act. So far, it has been very unclear when this is possible. The Supreme Administrative Court has now taken a pragmatic stance with respect to investment funds regarding the economic substance requirements of the Finnish CFC Act, which set a very high bar for any activities to being exempted from the CFC rules.

Published ruling KHO 2025:5

The decision involved a Japanese publicly traded trust-type investment fund with fewer than 30 shareholders. As is typical for investment funds, the fund was tax-exempt in Japan. Given that the fund was not comparable to a Finnish tax exempt investment fund, it was, as a starting point, considered a CFC of the Finnish investor entitled to at least 25% of the fund’s profits.
The Court, however, deemed that the fund’s activities, namely investing funds received from the public, constituted a genuine economic activity within the meaning of the CFC rules.
Furthermore, the Court stated that considering the specific characteristics of the industry, it was acceptable for the fund not to have its own personnel or premises, given that the fund’s management was outsourced to a management company located in Japan and independent of the fund’s investors.
The Court found that the industry exemption of the CFC Act related to non-EEA countries applied to the fund because it was publicly traded and provided investment services to the market.
As a conclusion, the Finnish investor was exempted from reporting its share of the fund’s income as CFC income in Finland.

Unpublished ruling KHO 2025 T 52

The case involved a sub-fund of a Luxembourg UCITS SICAV fund. It was an open fund investing in bonds and other fixed-income securities, with net assets exceeding 50 million euros.
Although the fund had characteristics similar to a Finnish tax-exempt investment fund, it had fewer than 30 shareholders, preventing it from being equated with a domestic tax exempt investment fund. Since it was exempt from income and wealth tax in Luxembourg, it would, unless subject to the exemption, be considered a CFC of the Finnish investor entitled to at least 25% of the fund’s profits.
The main fund’s board was responsible for the fund’s investment policy, objectives, and management. However, Luxembourg law required the fund’s operational activities to be managed by a separate management company. The fund’s board appointed a separate Luxembourg management company, which, however, had outsourced the asset management to a British group company.
The Court considered the fund to be engaged in a genuine economic activity in Luxembourg. The Court decided to annul the advance ruling given by the Central Tax Board because the applicant had not established whether the fund had the necessary staff and premises in its country of residence Luxembourg to conduct its operations given that the asset management was outsourced to a British group company.

Published ruling KHO 2025:4

A Finnish investor owned a stake in a low-tax entity located in the Isle of Man via two limited partnerships. The Court ruled that the Finnish investor had a controlling shareholding in the low-tax entity and the relative share of the Finnish investor was to be taxed as its CFC income. However, dividends distributed from the low-tax entity via the LPs were tax exempt to the extent they had already been taxed as CFC income. The Court’s decisive reasoning was that the same monetary benefit should not be included in the taxpayer’s taxable income more than once, a general principle of the income tax system also demonstrated in the CFC Act.

Takeaways

Entities carrying out genuine economic activities with adequate economic substance (staff, premises and funds) in their state of residence can be exempted from application of the Finnish CFC rules. If the entity is in a non-EEA jurisdiction, exemption from CFC rules additionally requires that the entity’s activities consist of industrial manufacturing or an activity comparable to or directly supporting industrial manufacturing.

So far, it has been unclear whether investment funds qualify for the exemption. This is especially because the staff managing the fund’s assets is usually employed by a separate management entity, to which the management has been outsourced, not by the investment fund entity itself (except for self-managed funds). The Court’s rulings establish that an investment fund can be exempted from the CFC rules regardless of this common practice of outsourcing the operations, which in many jurisdictions is even a legal requirement. On the other hand, the Court’s express emphasis on the independency of the potential CFC’s activity and decision-making. This is being assessed in relation to the Finnish taxpayer and thus poses a potential problem for self-managed investment funds and private investment companies, in which the shareholders typically participate in making the investment decisions as members of the board. As regards non-EEA investment funds, they can qualify for exemption at least if they are publicly traded.

Despite the good case law open questions remain. It can be asked whether the requirement of the Finnish CFC rules that the entity have economic substance in the same country where it is resident conforms with the principle of freedom of establishment of EU law. The Finnish CFC rules set a relatively high bar for exemption especially given the fact that they are entity based and thus considerably stricter than what is required by the EU Anti-Tax Avoidance Directive. In recent legal debate, even the whole fundamental idea of the CFC rules as entity-based rules has been questioned on the basis that this might be against EU law. Roschier lawyers are happy to discuss the CFC rules in more detail would they be relevant in your existing or planned structure.