Foreign special investment fund
Special investment fund with one direct unitholder deemed tax exempt for income tax purposes in Finland
We advised a German investment management firm in a tax dispute concerning the tax treatment of a German investment fund investing mainly in real estate. The Helsinki Administrative Court ruled the matter in our favour and stated that the fund must be considered as tax exempt for income tax purposes in Finland.
The tax dispute concerned the taxation of the income that a German special investment fund investing in Finnish real estate received from Finland. The fund had only one direct unitholder, but it was part of a larger investment structure that effectively involved the co-investment of assets of a large number of individuals and the diversification of investments, including Finnish real estate.
The tax dispute concerned the Finnish Income Tax Act’s provision on the tax exemption of investment funds. The Finnish Income Tax Act includes a tax exemption provision that, under certain conditions, exempts domestic and foreign investment funds and special investment funds from income tax in Finland at the fund level. Said tax exemption provision became effective in tax year 2020 and has since caused challenging interpretation differences with the tax authorities as well as several tax disputes. The CJEU has issued a preliminary ruling on one aspect of the Finnish tax exemption provision, and the Finnish Supreme Administrative Court has recently issued rulings on the tax treatment of investment funds. The legal question under dispute has raised a lot of academic debate over the past years. The domestic provisions and their application with respect to foreign investors have proven to be problematic from the perspective of the EU fundamental freedoms.
We submitted an advance ruling application to the Tax Administration to confirm that, despite having only one direct unitholder, the German fund is treated as tax exempt for income tax purposes in Finland, because it meets the profit distribution requirement set out in the legislation. The Tax Administration issued a negative ruling to the fund and deemed that the fund cannot be treated as tax exempt for income tax purposes in Finland. We successfully assisted with appealing the advance ruling decision to the Helsinki Administrative Court, which ruled in our favour and stated that the fund must be considered as tax exempt for income tax purposes in Finland.
The decision of the Helsinki Administrative Court became final in May 2023.