Finland – filing of withholding tax reclaims for non-listed SICAVs: the way forward
On 19 December 2016, the Finnish Supreme Administrative Court (“FSAC”) issued its decision regarding a Maltese non-UCITS SICAV and came to the conclusion that the fund is not entitled to a withholding tax (“WHT”) exemption. The purpose of this newsletter is (1) to present the court case and (2) to argue that the non-listed SICAVs should, in the light of EU law, in reality be entitled to the WHT exemption. Additionally we will give an outlook on how the situation may evolve for these funds taking into account legal action undertaken by KPMG.
Background of the FSAC’s decision
An investment fund domiciled in Malta (“the Fund”) was considering investing in shares from Finnish publicly traded companies. The fund had the following characteristics:
In view of the above, and in order to clarify its tax treatment on this potential investment, the Fund requested an Advance Ruling from the Finnish Central Tax Board (“FCTB”). Pursuant to Finnish domestic law, Finnish investment funds are tax-exempt and thus not liable to taxation on dividends received from Finnish listed companies. By contrast domestic LLCs are taxed on such income – except in cases where they are listed. Consequently, the Maltese Fund argued that it would be comparable to a [tax-exempt] Finnish domestic investment fund and, therefore, entitled to an exemption from the Finnish WHT.
Upon processing the application, the FCTB however concluded that, due to its legal nature and activity, the Fund was in reality comparable to a Finnish LLC and, hence, not entitled to the requested exemption.
Disagreeing with the decision of the FCTB, the Fund then appealed to the FSAC, Finland’s highest court for tax matters, under the argument that the denial of the WHT exemption would be contrary to the Free Movement of Capital as provided for under article 63 of the Treaty for the Functioning of the European Union (“TFEU”). The claim put forward in front of the FSAC was that the Fund should rather be compared to a Finnish investment fund, and not to a domestic LLC.
The decision from the Supreme Administrative Court
FSAC decided against the Fund, upholding the decision from the FCTB deeming the fund as comparable to a Finnish LLC and not to a Finnish investment fund.
In its reasoning, the FSAC argued that, unlike Finnish investment funds, which are organised as a collective ownership, the Maltese Fund was organised as a SICAV and, therefore, had a separate legal personality and was the legal owner of the investment assets. The FSAC used a formalistic approach by stating that the legal characteristics of the Fund were thus not comparable to any entity known under Finnish legislation.
In addition, taking into account the legal features, the applicant was not considered comparable to a Finnish investment fund, which is actually not a separate legal person and whose assets are owned by the unit-holders.
In view of that, and considering that dividends received from publicly listed Finnish companies by a Finnish LLC would be taxable in Finland, FSAC concluded that no discrimination would occur and, therefore, denied the exemption.
The way forward
Based on the decision above, the Finnish authorities argue that there is no discrimination in levying WHT towards non-resident investment funds that are constituted under corporate form (e.g. Luxembourg SICAVs) and are not publicly traded (since, as previously mentioned, for listed companies dividends received from Finnish listed companies are tax-exempt under Finnish domestic law).
In the light of the Court of Justice of the European Union’s (“CJEU”) case law (i.e. C-303/07 “Aberdeen”; C-342/10 “Commission v. Finland”; joined cases C-338/11 to C-347/11 “Santander Asset Management SGIIC SA”; and C-190/12 “Emerging Markets Series”) we take the view that such an interpretation constitutes a restriction on the Free Movement of Capital. Our conclusion applies both to UCITS and non-UCITS non-listed SICAV investment funds.
With reference to the abovementioned case law, it is our understanding that the comparability analysis to be performed between domestic and foreign entities should not be performed based on formal characteristics such as incorporation. It should rather take other elements into consideration, such as the overall purpose and activities carried by investment vehicles. As such, the fact that a foreign investment fund is set up in corporate form should not, per se, be sufficient to prevent it from being comparable to a Finnish investment fund.
In order to ensure that EU law is in the future correctly applied by Finnish court and tax authorities, KPMG is intending to file a complaint with the EU Commission. The aim is to convince the EU Commission to launch an infringement procedure against Finland on this ongoing discrimination. We are furthermore awaiting the decision for one of our clients (a non-listed non-UCITS SICAV) which has also requested an Advanced Ruling with the FCTB.
We believe that these actions will be successful and should in the long run lead to reimbursement of WHT towards non-listed corporate funds. In the meantime, we recommend non-listed corporate funds, such as Luxembourg SICAVs, to continue filing WHT reclaims in order to safeguard their rights.
1 Aberdeen (C-303/07) paras. 51, 55; Commission vs. Finland (C-342/10), para. 43.
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