The Tax Disputes and Litigation Review: Finland

Introduction

The courts in Finland are divided into general courts dealing with criminal cases, civil cases and petitionary matters, and administrative courts adjudicating administrative acts such as tax decisions issued by the Finnish Tax Administration. Further, the specific feature of tax litigation in Finland in comparison with other administrative appeal proceedings is its particular focus on the rectification of a decision issued by the Finnish Tax Administration. As another feature, a taxpayer is required to file a claim for adjustment to a special administrative body, the Board of Adjustment, before entering into court proceedings.

Even though oral preparations and oral hearings may be applied for, litigation in tax matters is mainly carried out through written proceedings. Further, as the resources of the courts and other authorities engaged in appellate proceedings are often limited, one should prepare for long processing times and prolonged uncertainty. In general, tax litigation proceedings may take several years, which can lead to excessive costs and practical complications for taxpayers. This is very different from other forms of commercial disputes where the majority of the more significant cases are dealt with in arbitration and the final decision is generally available nine months after lodging an appeal.

Tax assessment decisions may in general terms be discussed in advance with the Finnish Tax Administration. For example, taxpayers can enter preliminary discussions with the Administration. Corporate taxpayers may discuss a variety of tax issues with the authority (e.g., the taxation of certain transactions). The guidance and instructions provided by the Administration during these discussions are binding, however, only if specific requirements set out in the Act on Tax Assessment are met. In practice, whenever the issues discussed with the Administration are controversial, they end up being resolved in formal tax litigation proceedings. Therefore, a great majority of the complex tax disputes are resolved through extensive tax litigation.

Commencing disputes

A tax dispute is initiated in all tax matters by filing a claim for adjustment against a first-stage tax assessment decision issued by the Finnish Tax Administration. The request of a taxpayer is addressed in writing, and in some exceptional cases also orally. A claim for adjustment is then investigated by the Board of Adjustment.

Taxpayers may also, on their own initiative, amend or correct tax returns filed with the Administration as long as the tax assessment for the tax year at issue is still open.

As of 1 January 2017, the statute of limitations periods were largely harmonised. Accordingly, the general statute of limitations governing a taxpayer's right to appeal in tax matters is three years. The three-year period is, as a general rule, counted as of the end of the tax year assessed (e.g., for tax year 2021 the three-year period will end on 31 December 2024). The former time limit of five years will, however, still be primarily applied to tax decisions and appeal proceedings concerning tax years up to and including 2016. Further, appeal proceedings regarding first-stage tax decisions issued 1 January 2017 or thereafter, based, for example, on tax audits concerning previous tax years, are assessed in accordance with the new legislative regime.

The former general statute of limitations of five years was counted from the beginning of the calendar year following the tax assessment of any given tax year. For example, the date of completion of tax assessment for tax year 2016 was 31 October 2017. The period of appeal for tax year 2016 will expire on 2 January 2023 (as 31 December 2022 is a Saturday). This is the last day of the appeal period, and the last day for any appeal under the former regime.

Further, the tax recipients (the state, local municipalities, the church, etc.), represented by the Tax Recipients' Legal Services Unit, an autonomous entity within the Finnish Tax Administration, are also entitled to appeal a tax assessment of any given taxpayer. The statute of limitations for the Unit's appeal is four months as of the completion of the tax assessment of a taxpayer for any given tax year. As an example, for tax year 2021, ending on 31 December 2021, tax assessment should have been be completed by 31 October 2022 and accordingly the appeal of the Unit should be filed by the end of February 2023.

It is also possible that the Finnish Tax Administration will seek to reassess a taxpayer's taxation on its own initiative (a reassessment). As of 1 January 2017, reassessments concerning tax years 2017 and onwards shall, as a general rule, be accomplished within three years of the end of the relevant tax year. The three-year limit of the Administration may be extended by one year where, for example, the tax assessment is considered to be impeded by the taxpayer, or if the matter requires the Administration's cooperation with other officials. In addition, an extended time limit of six years may be applied in matters concerning, for example, transfer pricing or financing arrangements between related companies.

Under the former regime, the Finnish Tax Administration's income tax reassessment for tax years 2016 and earlier must be accomplished in one, two or five years as of the year of tax assessment of a taxpayer. As an example, with a five-year period the reassessment for tax year 2016 must be completed by the end of 2022. The time limit applied depends on the degree of guilt addressable upon a taxpayer; for example, the maximum time limit of five years is applicable in cases where the taxpayer has failed to properly file a tax return, or if the tax return or other document filed with the Administration has been false, incomplete or misleading.

As of 1 January 2017, for tax years 2017 and onwards, the reassessment by the Finnish Tax Administration may be carried also to the benefit of the taxpayer within three years of the end of the tax year assessed. For tax years 2016 and earlier, however, the maximum time limit of five years applies. The time limit is two years in cases where there has been a calculation or typing error by the Finnish Tax Administration, or the incorrect taxation has been based on incorrect or incomplete information received from third parties. In other situations, for the tax years 2016 and earlier, the statute of limitations is one year.

The statute of limitations for tax years 2016 and earlier have, however, varied depending on the tax matter in question. For instance, in VAT matters a taxpayer must appeal within three years of the end of the financial year in question. Furthermore, a taxpayer may appeal a tax assessment decision or a decision issued by an appellate body within 60 days of receiving notice of the decision, irrespective of whether the statutory limitation is exceeded.

In many cases the taxpayer may seek to obtain certainty with regard to a specific tax question subject to interpretation by applying for an advance ruling from the Central Tax Board or the Finnish Tax Administration. The Central Tax Board is an autonomous body within the Administration with the specific purpose of issuing advance rulings in tax matters. However, unambiguous or less important matters may be examined by the Administration itself. An appeal against an advance ruling by the Board is filed directly with the Supreme Administrative Court, whereas an appeal against an advance ruling by the Administration is filed with an administrative court. The time limit for filing the appeal to both instances is 30 days. An advance ruling application may also be rejected, in which case no advance ruling is issued. A decision rejecting an advance ruling application may not be appealed.

A taxpayer has the right to file a complaint to the chancellor of justice of the government or to the parliamentary ombudsman if the taxpayer considers a civil servant (fiscal agent) to have conducted an unlawful action. The chancellor and the ombudsman generally inform the authority of their view on the matter. Additionally, the said authorities may recommend that the decision is amended, but they do not have the power to overturn a decision.

The courts and tribunals

The Central Tax Board is an independent body within the Finnish Tax Administration. The Board functions in different units, each of which resolve appeals relating to various tax matters. As mentioned above, as of 1 January 2017, the primary appeal authority will be the Board regardless of the type of tax against which the taxpayer is appealing.

The Board consists of members representing taxpayers' organisations, municipalities and the Administration. Much like in administrative courts, proceedings in the Board are mainly written, and in many cases, the tax dispute is finally resolved by the Board, without ever entering court proceedings.

The Finnish Tax Administration may, however, resolve an appeal addressed to the Board if the matter is so unambiguous that it does not require further examination. Such a decision issued by the Administration may also be appealed to an administrative court.

As explained above, a decision of the Board (an adjustment decision) may be appealed to an administrative court. The appeal period is determined in accordance with the general statute of limitations, and in cases where the general statute of limitations has expired, the appeal period is no less than 60 days from the decision by the Board. Administrative courts consist of independent professional judges.

In general, all matters are resolved through written proceedings, even though the courts have the possibility to hold oral hearings. Oral hearings may be initiated either at the request of a party or on the court's own initiative. Although having an oral hearing at the request of a party is the main rule according to the law, it may be departed from if the relevant facts to the case can be clarified by other means or an oral hearing would be manifestly unnecessary in view of the nature of the matter and its significance to a party, assuming the prerequisites for fair trial are fulfilled at all times. As of 1 January 2020, there is a new option for oral preparation available on large disputes to, inter alia, differentiate the undisputed facts and to further clarify the case. As tax matters have become more complex in their fact patterns and may contain challenging legal questions, there are reasonable grounds to expect that the number of oral hearings held in tax proceedings will increase in the future. In conclusion, while preparing the letter of appeal, adequate emphasis should be placed on the fact that it could be the only opportunity to properly present the facts of a complex case in a well digestible manner to the judges, which calls for specific expertise.

Decisions by the administrative court may be appealed further to the Supreme Administrative Court, which is the highest court of appeal in all tax matters in Finland. The period of appeal is 60 days from the decision by the administrative court. Appeals to the Supreme Administrative Court require a leave to appeal. Leave to appeal may be granted on the basis of precedential importance, a manifest error in the matter or weighty economic or other reasons.

The judges of the Supreme Administrative Court include the president and 20 justices, as well as a few temporary justices. As in any other instance, the proceedings are primarily written, oral hearings being even rarer in the highest court instances. The most significant decisions are published annually in the court's yearbook. Additionally, some decisions are published as short summaries. Instead of granting a final judgment in the matter, the Supreme Administrative Court may also remit the matter to the administrative courts or the Finnish Tax Administration for a new hearing.

In exceptional situations, it is possible to appeal a decision by the Board directly to the Supreme Administrative Court. Accordingly, the Supreme Administrative Court may grant leave to a direct appeal in cases considered important to establish a precedent for similar cases in the future, or for the uniformity of legal praxis. In cases where a direct appeal to the Supreme Administrative Court is sought, the Tax Recipients' Legal Services Unit shall be reserved an option to issue its statement in the matter before referring it to the Supreme Administrative Court.

As mentioned above, the Central Tax Board acts as an autonomous advance ruling forum within the Finnish Tax Administration, and makes significant tax-related decisions in Finland. It may issue advance tax rulings in matters relating to income taxation and value added taxation. The advance rulings issued by the Board have significant precedential value and many of them are published. The Board consists of members representing the Administration, taxpayers' organisations and tax recipients. Rulings by the Board are ordinarily issued within a couple of months from the date of the request. The rulings are considered binding only on those tax questions to which they relate. Therefore, it is important for the taxpayer to consider that the ruling for a previous tax year may not be applicable after the tax year in question.

Advance rulings made by the Central Tax Board are appealed directly to the Supreme Administrative Court, and the appeal period is 30 days from receipt of the Board's decision. No leave to appeal is required.

Penalties and remedies

The rules on punitive tax increase are scattered in different tax laws; however, gradually, as of 2018, the varying stipulations are widely being harmonised. A punitive tax increase is imposed in matters relating to income taxation, real estate taxation, inheritance and gift taxation and transfer taxation. Further, specific stipulations are included in the Finnish Procedures Act on Payments of Unprompted Taxes relating to, inter alia, VAT and tax prepayment with, however, similar harmonised structure of stipulations to the other areas of taxation mentioned. However, this harmonised regime is applied in matters relating to real estate taxation and transfer taxation only as of 1 November 2019. The exact dates of applicability should be reviewed in more detail case by case.

As a rule, the Finnish Tax Administration imposes a punitive tax increase if the taxpayer has failed to fulfil his or her tax-related obligations, unless the failure was only minor or there was a valid reason for the delay. The tax increase may, however, be remitted if it would be disproportionate under the circumstances.

The tax increase shall be in general 2 per cent of added income or 10 per cent of added tax. It may also be increased if the failure of the taxpayer is repetitive or reflects gross negligence, in which case the tax increase shall be 3 to 10 per cent of added income or 15 to 50 per cent of added tax. On the other hand, the tax increase may be decreased if the case at hand is open for interpretation or unclear.

Should a taxpayer request an adjustment on his or her own initiative and to his or her detriment, the tax increase is 0.5 per cent of added income or 2 per cent of added tax if the taxation period has expired. However, if the taxation period has not yet expired, a fee for late tax return is imposed instead of a tax increase. The fee is €50 for individual taxpayers and estates, and €100 for corporate taxpayers. It may not be imposed if the filing of the tax return has been delayed for reasons that are not related to the taxpayer, if the failure is minor or if there was a valid reason for the delay.

Certain significant punitive tax increases may also be payable regardless of whether there are any unpaid taxes claimed by the Finnish Tax Administration. For instance, a failure to present transfer pricing documentation within a stipulated time frame may be sanctioned with a maximum amount of €25,000. Also, in connection with European Council Directive 2018/822 pertaining to mandatory exchange of information regarding specifically defined reportable cross-border arrangements (Reportable Arrangements) a penalty of up to €15,000 may be ordered in case of deficiencies.

From a human rights perspective, a punitive tax increase is considered a criminal penalty in Finland. The European Court of Human Rights has, on numerous occasions, considered punitive tax increases to be comparable to criminal sanctions. This notion naturally affects the discussion relating to the ne bis in idem principle. According to the said principle, the defendant cannot be prosecuted repeatedly on the basis of the same offence. The Finnish Supreme Administrative Court has stated, however, that the ne bis in idem principle only applies to individual taxpayers (natural persons) because only physical individuals can be sanctioned for tax crimes. The principle therefore does not apply to companies.

In addition to actual tax penalties, penalty interest may be payable on unpaid tax amounts. In income tax matters, the general late payment interest is 7 per cent per annum (2021). Furthermore, penalty interest is payable for non-reported taxes in the electronic VAT and employer payroll withholding and reporting system at the rate of 7 per cent.

Lastly, criminal sanctions may be imposed on the taxpayer in cases relating to severe tax evasion. Tax fraud occurs when an individual or business entity wilfully and intentionally falsifies information on a tax return to limit the amount of tax liability. Tax fraud essentially entails cheating on a tax return in an attempt to avoid paying the entire tax obligation. Aggravated tax fraud, being the most serious form of tax-related crime, is sanctioned with imprisonment for a term of at least four months and a maximum of four years. For non-aggravated tax fraud, the sanctions vary from fines to imprisonment for a maximum of two years. As for minor tax offences, they are generally sanctioned with fines. The monetary threshold for aggravated tax fraud is relatively low in Finland. According to legal praxis, monetary interests of some tens of thousands of euros have been considered sufficient for the tax evasion to qualify as aggravated tax fraud.

The statute of limitations applicable in criminal proceedings can be longer than the ones applied in tax matters. For instance, aggravated tax crime becomes time-barred after 10 years. Also, a taxpayer found guilty of a tax crime may be ordered to pay damages to the tax recipients in respect of all the years that are not time-barred according to the statute of limitations applicable in criminal proceedings. In criminal matters, taxpayers have no responsibility to provide any evidence of their innocence, but the prosecutor has to fulfil its burden of proof.

Tax claims

i Recovering overpaid tax

Overpaid income tax is generally refunded to a taxpayer as a tax refund if the taxpayer's tax withholdings or tax prepayments exceed the final amount of tax payable for the tax year in question. The refund is made within one year after the end of the relevant tax year or financial period. A refund of overpaid taxes may be possible even before the regular tax refund payment date upon a specific application. Repayment of interest of 0.5 per cent per annum by the Finnish Tax Administration to a taxpayer applies where taxes are refunded.

A separate refund application should expressly be filed with the Finnish Tax Administration when a non-resident taxpayer has been charged withholding taxes in Finland that exceed the maximum level allowed under an applicable tax treaty and EU principles. A similar refund process also exists in matters relating to transfer taxes.

Additionally, overpaid VAT may be refunded automatically to the taxpayer from the electronic VAT and employer payroll withholding and reporting system based on the periodic tax return filed by the taxpayer. The Finnish Tax Administration issues a separate decision on the refund application only if it rejects the periodic tax return partially or entirely. This decision is subject to a separate appeal.

From 1 January 2021 onwards, the new Organisation for Economic Co-operation and Development (OECD) Treaty Relief and Compliance Enhancement (TRACE) model has been applied in Finland. The rules provided a revised framework for the system of withholding tax relief at source and modified the tax regime and procedures relating to dividends paid on nominee-registered shares.

Under the withholding tax relief at source rules, payments of Finnish source dividends on nominee-registered shares to non-residents of Finland are subject to withholding tax at a default rate of 35 per cent. Tax treaty based withholding tax reliefs can, in general, only be applied in respect of dividend recipients who are customers of an authorised intermediary. The grant of tax treaty benefits requires in essence that the authorised intermediary in question be registered in the new Register of Authorised Intermediaries and that the authorised intermediary has:

  1. investigated and identified its customer (the dividend recipient);
  2. verified the dividend recipient's country of residence for tax purposes and the applicability of appropriate tax treaty provisions (i.e., collection of information regarding the beneficial owner); and
  3. committed to report the dividend and beneficial owner information to the Finnish Tax Administration.

In terms of disputes arising in Finland where commercial parties to a certain arrangement make claims upon tax-related obligations, these are dealt in accordance with general rules applying to commercial disputes. To elaborate, the general statute of limitations period for civil law claims is three years. The period of three years starts to elapse once a party has discovered, or should have discovered the defect subject to scrutiny. To interrupt the period of three years the creditor will have to claim payment from the debtor, individualise the claim or damage and present the proper basis for the claim.

ii Challenging administrative decisions

In Finland, the vast majority of administrative appeals in tax matters relate to the interpretation of the technical tax rules applicable in the case at hand. However, there are also significant tax disputes dealing, inter alia, with tax avoidance or transfer pricing and how certain transactions should be characterised based on specific rules in Finnish tax legislation. In general, the Finnish Tax Administration may occasionally adopt approaches and interpretations deviating from those adopted with regard to other taxpayers. These deviations may be challenged (e.g., under the constitutional principle of equality).

Additionally, there are a number of examples from case law that relate to, for example, the protection of the taxpayer's legitimate expectations in cases where the taxpayer has relied on an established tax practice or advice issued by the Administration. The protection of legitimate expectations secures the realisation of the binding foundations of the Finnish tax system, and, as an established norm, must be taken into consideration by the Finnish Tax Administration in its decision-making. A claim based on the protection of legitimate expectations may succeed if a decision by the Administration conflicts with its earlier advice or an established practice.

Also, the principle of legality whereby the tax payable should be based strictly on enacted law, not on administrative decisions, has been firmly upheld in recent praxis. In other words, general guidance issued by the Administration is subordinate to enacted law and can be challenged if applied contrary to law. Further, individual rulings are binding upon the Administration as issued.

iii Claimants and related parties

The taxpayer and anyone whose taxation is directly affected by an assessment decision issued is entitled to plead the case in the appellate proceedings. In practice, this requires an actual tax impact in the specific case at hand upon the appellant. For example, the spouse of an individual taxpayer may have a right to appeal on this basis, and similar cases may arise in relation to partnership and bankruptcy estates. In these cases, a question of consequential change may be applicable. If a tax decision of a taxpayer affects the taxation of another, the Finnish Tax Administration may reassess the latter's taxation accordingly. In general, one cannot agree upon the formal tax liability but the parties to an arrangement typically agree on consequences related to misconduct by either party in fulfilling tax-related obligations.

In VAT matters, a person subject to VAT may file an appeal in the tax process in relation to a VAT matter reported by him or her. Specific conditions may apply upon a seller and a buyer in sales transactions and should be considered on a case-by-case basis and accounted for in entering transfer agreements. Applicability of a specific set-off possibility as per the Finnish Value Added Tax Act should be considered in cases where the VAT has been executed erroneously between the parties of a sales transaction.

In general and as explained above, the tax recipients (i.e., the state, local municipalities, the church, etc.) are represented by the Tax Recipients' Legal Services Unit. The Unit is not bound by the decisions and guidelines of the Finnish Tax Administration and has a right to appeal tax assessment decisions as well as act on behalf of the tax recipients in all tax appeal matters. The Unit is divided into three groups: personal taxation and tax prepayment, corporate taxation, and VAT matters.

The Unit has the right to appeal tax decisions to the benefit of a taxpayer as well. Respectively, taxpayers may request the reassessment of a tax decision on their own initiative on the basis of not having paid sufficient amount of taxes.

Costs

Taxpayers have the right to claim compensation for their tax litigation costs. However, the right only applies to court proceedings; administrative proceedings leading up to the court proceedings, including proceedings in the Board, are excluded from this rule. In addition, a successful claim for compensation usually requires that the taxpayer succeeds in his or her principal claim, the matter has significant value relating to the interpretation of law, or that granting such compensation can be based on another special ground. Tax litigation costs are therefore, in practice, rarely compensated even in cases where the final decision is in favour of the taxpayer.

This situation stems directly from administrative procedural legislation according to which a party should be held liable for the other party's legal costs only if, in view of the resolution of the matter, it would be unreasonable to make the latter bear his or her own costs. The interpretation of this standard has been strict, and the compensated costs, if any, are often limited to a nominal amount.

Respectively, the chances of the Finnish Tax Administration recovering any costs from the taxpayer are extremely slim. Under current procedural rules, a private party should not be held liable for the costs of a public authority, unless the private party has made a manifestly unfounded claim. The starting point is understandable and pertains directly to the fact that the tax authority is always in a stronger position in such proceedings.

These rules have, however, caused administrative litigation, especially tax disputes, to significantly differ from civil litigation as the principle of full compensation does not materialise. In practice, the taxpayer's costs in significant tax litigation may be quite substantial, whereas the Finnish Tax Administration would just operate under the public budget with practically no risk of costs.

Alternative dispute resolution

The European Council Directive (2017/1852/EU) on Tax Dispute Resolution Mechanisms in the European Union, which seems to echo the sentiment and aim of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project to improve dispute resolution mechanisms and minimise risks of uncertainty and unintended double taxation, is implemented and in force in Finland by means of a new Act on Dispute Resolution Mechanisms in International Tax Disputes.

The Act stipulates an alternative dispute resolution procedure that may be applied to cross-border tax disputes relating to the interpretation of double taxation conventions or the EU Arbitration Convention (90/436/EEC). The relevant parts of the procedural rules are also applied to the alternative dispute resolution procedures stipulated in the double taxation conventions and the EU Arbitration Convention. The Act entered into force on 1 July 2019 and the procedure would be available to complaints that are filed on 1 July 2019 at the earliest and concern tax years beginning 1 January 2018 or later.

In light of the multilateral instrument implementing the OECD measures and transposing the results from the BEPS project and the mandatory binding arbitration provision therein, even though Finland signed the multilateral instrument, there are number of reservations about the arbitration proceedings conducted by Finland. However, arbitration may also be carried out in accordance with the EU Arbitration Convention, which may be applied to transfer pricing disputes.

Recently, the Finnish Tax Administration has attempted to introduce a kind of mediation forum to cover, under the supervision of the Administration's internal mediators, disputed facts in complex matters to leave the scrutinised matter to be solved to the extent possible under its juridical merits. In addition, pre-emptive discussions are carried out where binding conclusions with the taxpayer's right to legitimate expectations would, however, be at hand only under specific conditions. In general, the Administration is willing to pursue new means of resolving controversies and is open to discussion, even if only with limited binding effects.

Anti-avoidance

Finnish tax legislation includes a general anti-avoidance rule for the purpose of preventing tax avoidance. According to the rule, the legal form of a situation or a measure that does not correspond to the true nature or purpose of the matter shall be taxed as if the correct form had been used. To avoid the application of the anti-avoidance rule, the arrangement in question must have legitimate business-related justifications instead of mere tax-related reasons (i.e., business reasons). When applying the anti-avoidance rule, the legal form of an action may be disregarded for tax purposes, in which case the amount of tax will be assessed as if the transaction had been carried out using the correct form.

The Finnish Tax Administration and the courts apply the principle of substance over form as stated in the tax legislation. If the Administration concludes that there is no adequate business reason underlying a transaction between related companies, or that a transaction has been given a legal form that does not correspond to its true nature, it may consider the transaction to be null and void for tax purposes, and assess the amount of tax as if the real form had been used. Disregarding form for tax purposes does not affect the validity of the transaction as such, but it may still be regarded as valid under company law and for other legal purposes.

If it is evident that a company has paid its shareholder more than a reasonable amount as salary, housing benefit, entertainment or insurance, or if the company pays its shareholder interest, lease payments, commission or other such benefits, and the amount exceeds what the company would ordinarily pay to third parties, the amount of tax may be assessed based on the amount that the tax authority deems to be in excess of the reasonable amount. This type of conduct is referred to as hidden profit distribution.

If the Administration concludes that the arm's length principle has not been observed in transactions between related companies, the taxation of these companies may be corrected and reassessed to reflect the arm's length conditions (transfer pricing). This reassessment does not require any evidence of tax-avoidance. Finnish subsidiaries and branches of non-resident companies are treated similarly to resident companies.

In addition to general anti-abuse rules (GAAR), Finnish tax legislation includes specific anti-abuse rules (SAAR) implemented to complete the GAAR legislation. However, even though Finland has an extensive network of double tax treaties, the treaties Finland has entered do not include GAAR, nor do they have any stipulations as to the applicability of the Finnish GAAR in the tax treaty environment. In light of this, even if there may be various views, it can be concluded the Finnish GAAR may be applied in casu in denying the tax treaty benefits, but only with respect to clear tax avoidance schemes.

Further, Finland has signed the Multilateral Convention to Implement Tax Treaty Related Measures to prevent BEPS with specified effects upon the tax treaties of Finland. In terms of treaty abuse, however, Finland has chosen to take the Principal Purpose Test approach: that is, the denial of all or part of the benefits that would otherwise be provided based on a tax treaty, where the principal purpose or one of the principal purposes of any arrangement or transaction, or of any person concerned with an arrangement or transaction, was to obtain those benefits.

Finland is within the purview of the EU Anti-Avoidance Directive (ATAD), as amended by the second directive (ATAD II). What is interesting to note is the fact that the GAAR by ATAD contains, inter alia, the 'main purpose or one of the main purposes' formulation, whereas the threshold to apply the Finnish GAAR is higher as it can be applied when basically the only purpose of the arrangement is the avoidance of taxes.

Double taxation treaties

Finland has an extensive network of double taxation treaties in the areas of income and capital taxes. The treaties are based on the OECD Model Convention. Finland's tax treaties are based either on the resident state principle or the source state principle, which is in line with Finnish domestic tax legislation.

Finnish domestic law does not include any special rules concerning the interpretation of tax treaties, but the interpretation is based on the Vienna Convention, the OECD Model Convention as well as basic domestic principles governing the interpretation of Finnish tax legislation. The Supreme Administrative Court acts as the final forum to interpret tax treaties in Finland.

The Supreme Administrative Court has effectively applied the OECD Model Convention in its rulings, because of which the Convention should be considered a source of interpretation for the court. The role of the OECD Transfer Pricing Guidelines and its commentaries is more unclear, however, and the question of the relevance of these guidelines as a source of interpretation in Finnish taxation proceedings remains ambiguous. For instance, the Finnish Tax Administration has drawn rather far-reaching conclusions in transfer pricing cases from relatively vague statements in the OECD Guidelines, whereas the Supreme Administrative Court has in its 2014 ruling stated that the OECD Guidelines cannot extend the scope of national legislation to the detriment of the taxpayer. This statement is currently applied as the general rule in transfer pricing matters.

There have been a number of significant decisions by the European Court of Justice (ECJ) regarding tax matters in Finland, which ultimately serves as proof of the influence that EU principles have on Finnish tax regimes.

However, there is some reluctance in adopting the EU principles or decisions by the ECJ. For instance, in its 2002 ruling the Supreme Administrative Court rejected an appeal regarding a tax assessment where a Belgian subsidiary of a Finnish company had been treated as a controlled foreign corporation for Finnish tax purposes without referring the matter to the ECJ. Based on a later ruling by the ECJ in the matter C–196/04 Cadbury Schweppes,2 the Supreme Administrative Court finally annulled its decision in 2011.

The ECJ ruled in July 2013 in its decision in the case C–6/12 P Oy3 that the Finnish tax loss carry-forward system, whereby the Finnish Tax Administration has its own discretion based on its own guidelines to decide which companies get the permission to use the tax losses forfeited because of an ownership change, was not against the illegal state aid provisions provided by EU law.

As a Member State of the European Union, Finland has implemented the VAT Directive in the Finnish Value Added Tax Act. In principle, all resident entrepreneurs who are engaged in the commercial supply of goods or services are subject to VAT and are required to register for VAT purposes. However, suppliers of selected goods and certain services are exempt. The system is based on self-assessment by registered entrepreneurs. Entrepreneurs are required to pay VAT even when their products are used for private purposes or given as free gifts. The general VAT rate is 24 per cent. Reduced rates of 14 per cent and 10 per cent apply to, for example, restaurant services and transport services. There are a large number of exemptions from VAT, such as financial services and the sale of real property. In addition, a VAT threshold system has been incorporated into the Finnish tax system according to which there is no obligation to register for VAT purposes, and no VAT is levied on the taxpayer if the annual turnover of the taxpayer's business activity does not exceed €15,000. When this threshold is exceeded, the taxpayer receives a relief that gradually decreases with the increase in turnover. The full amount of VAT is levied if the annual turnover is currently €30,000 or more.

Areas of focus

Following the relatively aggressive approaches taken by the Finnish Tax Administration in recent years in focusing on transfer pricing matters, there has been somewhat of a change towards the assessment of various procedural rules and regulations. The means applied by the Administration in its aim to intensively collect revenues are increasingly questioned by the taxpayers. However, with the increased willingness by the Administration on, for example, pre-emptive discussions, this option should be carefully considered in controversial circumstances in order to try and minimise unnecessary lengthy disputes by clarifying contentious facts as early as possible.

Transfer pricing and allocation of income in a group structure continue to be topical in the Finnish tax practice. Various holding structures, including reinvestments in acquisition structures in connection with mergers and acquisitions are also actively scrutinised by the Finnish Tax Administration.

The Finnish government issued a new government bill on 21 October 2021 with purpose of revising the Finnish transfer pricing adjustment provision. Up to the present, the Finnish transfer pricing rules have allowed the tax authorities to increase the taxable income of the taxpayer if the terms and conditions of the intra-group transactions deviated from what would have been agreed on between unrelated parties (i.e., the terms and conditions of such transaction would not be regarded to be at arm's length). However, the rules have not allowed the Administration to disregard or recharacterise transactions which the authority aims to allow from here onwards under strictly specified circumstances.

In accordance with the proposed amendments, the new transfer pricing rules would expect an analysis of the actual contents of the transaction based on the economically relevant characteristics to be made each time as a part of transfer pricing process. Thus, the bill aims to permit making transfer pricing adjustments to the full extent allowed by the OECD Transfer Pricing Guidelines. Furthermore, the transaction between the related parties could be disregarded for transfer pricing purposes if the circumstances, in which the transaction was made, were exceptional. The new transfer pricing adjustment provision took effect as of 1 January 2022.

What should also be noticed is the new provisions regarding the tax residency status of foreign corporations which have taken effect as of 1 January 2021. Accordingly, a foreign corporation with its place of effective management (i.e., the place where the company's highest-level decisions concerning daily management are made) in Finland will be regarded as tax resident here. The new provisions may cause controversy in terms of defining the operations carried out in Finland by a non-Finnish corporate entity regarding local tax legislation and related double taxation treaties.

Further, the recently adopted new legislation allows the final losses of a subsidiary located in European Union or European Economic Area Member States to be deducted by a Finnish parent entity if the relatively strict criteria are met, as required by EU law. The rules have been applicable as of 1 January 2021 for tax years 2021 and onwards. These new rules should be accounted for in anticipation of possible controversy in cross-border structures within the purview of the new regime.

Finally, a topic very carefully followed with very little predictability is digitalisation and its effects to national and international taxation, and accordingly the phenomena should be looked at as highly controversial in the years to come. Finland is closely following the proposals by the OECD therein, and there are no attempts by the Finnish government to introduce, for example, a digital services tax in Finland.

Outlook and conclusions

By 13 December 2021, the Supreme Administrative Court issued 52 year-book rulings on tax matters. Personal income taxation, VAT and business income taxation have been the most represented among those 52 rulings. It appears the Finnish Tax Administration has been less active in large tax audits on transfer pricing, which emerged in connection with the introduction in Finland of the OECD BEPS measures, which has had an impact on the nature of the cases recently lodged with the Finnish courts turning out to be of more variance in their substance. However, the developments in implementing the OECD initiatives into Finnish legislation are likely to introduce new areas of focus in tax litigation in the years to come, with strong cross-border dimensions to them. The recent developments in the field of taxation clearly require more comprehensive capabilities, with the advisers primarily taking a strategic view of their advice with regard to litigation so as to minimise overly lengthy disputes in different jurisdictions

The Supreme Administrative Court has recently issued several interesting precedents concerning, inter alia, transfer of cryptocurrencies (2019:42), tax treatment of income based on a scrip dividend arrangement (2020:116), and VAT free cross-border sales of goods (2020:42). Furthermore, the Central Tax Board has issued an important preliminary ruling concerning a deduction of securities' forfeiture in personal taxation (2021/28). These decisions will be discussed in more detail below.

The Supreme Administrative Court overruled Tax Board's decision concerning the transfer of cryptocurrencies with a long-awaited precedent 2019:42. In the case at hand, an individual intended to transfer the cryptocurrencies in exchange for official currency (i.e., euro or US dollars). The Supreme Administrative Court ruled that the profit received by an individual based on the transfer of cryptocurrency was regarded as capital gain rather than exchange profit or other capital income, and therefore subject to capital gains tax.

Respectively, the Supreme Administrative Court's precedential case 2020:116 concerned income taxation — more accurately, the tax treatment of scrip dividend arrangement applied as an option for distribution of assets to shareholders of a listed company. In the said arrangement, the shareholders were given a choice to subscribe for the company's shares instead of receiving dividends in cash. The Supreme Ministrative Court held that no income was realised in connection with the shareholders receiving the voucher but at the time of the subscription of shares instead. Accordingly, the income received by the shareholders was treated as a dividend from listed company in the taxation of the recipient.

In its relatively recent rulings (2020:42) the Supreme Administrative Court issued a new precedent on the cross-border VAT free sales in Finland in addition to which the ruling had procedural dimensions as the Supreme Administrative Court exceptionally annulled its earlier decision on the matter. As the company in question had not been able to prove that the products imported by it from Russia and exported by it back from Finland to Russia would have, de facto, been transported to Russia, the sales were not considered to fulfil the conditions for cross-border tax free sales set out in the Finnish VAT legislation and therefore the VAT had been imposed on such sales. The Supreme Administrative Court did not grant a permission to appeal for the company and therefore, the decision of the Administrative Court was upheld in the ordinary appeal. The company had, by accident, received new documentation concerning the case as the Russian authorities had conducted an audit in the premises of the recipient company where the products exported by the company had been located. As this new information was considered to have essential impact on the decision, the Supreme Administrative Court accepted the company's claim and amended the previous decision. Thus, from the procedural point of view, the ruling further clarifies the circumstances in which the extraordinary appeal may take place based on new evidence appeared after the first decision has entered into legal force.

What has been interesting in the EU tax praxis is a ECJ's preliminary ruling in Case C–484/19 Lexel,4 in which it was argued that the cross-border debt push-down structure would have enabled aggressive tax planning. According to the facts of the case, the acquisition of a Belgian group company (the target company) by Lexel AB, established in Sweden (the purchaser) from a Spanish group company (the seller), was financed by an intra-group loan borrowed by a French group company (the borrower). The question posed was:

Is it compatible with Article 49 TFEU to refuse a Swedish company a deduction for interest paid to a company which is in the same group of associated companies and is resident in a different Member State on the ground that the principal reason for the debt having arisen is deemed to be that the group of associated companies is to receive a substantial tax benefit, when such a tax benefit would not have been deemed to exist if both companies had been Swedish, since they would then have been covered by the provisions on intra-group financial transfers?

The ECJ concluded that Article 49 of the Treaty on the Functioning of the European Union (TFEU) — the principle of freedom of establishment — precludes national legislation which provides that a company established in one Member State is not permitted to deduct interest payments made to a company belonging to the same group, established in another Member State, on the grounds that the principal reason for the debt linking them appears to be the obtaining of a substantial tax benefit, whereas such a tax benefit would not have been deemed to exist if both companies had been established in the first Member State, as in that situation they would have been covered by the provisions on intra-group financial transfers. Accordingly, such restriction on the freedom of establishment was not justified in the case at hand based on overriding reasons in public interest (i.e., grounds relating to the fight against tax evasion and tax avoidance, to safeguard the allocation of the power to impose taxes between the member state or combination of these two).

The outcome of the ECJ is rather interesting – although the Swedish tax authorities based its arguments on the concept of aggressive tax planning, the ECJ did not pay any attention to the concept from a legal perspective. Therefore, similar cases may remain unambiguous as the concept of aggressive tax planning is well introduced particularly in the Finnish legal literature and also debt push-down structures largely utilised in Finland. Currently, we are expecting related rulings by the Supreme Administrative Court early parts of 2022.

In the Lexel case, the ECJ also took a stand on the arm's-length nature of the transaction and stated that by complying with an arm's-length pricing of the transaction the transaction should not be considered as purely artificial or fictitious arrangements although the Swedish exception rule would have applied to such transactions as well.

Footnotes

1 Jouni Weckström is a partner at Waselius & Wist.

2 Judgment of 12 September 2006, Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v. Commissioners of Inland Revenue, C–196/04, ECLI:EU:C:2006:544,

3 Judgment of 18 July 2013, P Oy, C–6/12, ECLI:EU:C:2013:525.

4 Judgment of 20 January 2021, Lexel AB v. Skatteverket, C–484/19, ECLI:EU:C:2021:34.

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