Tax Alert


Tax Alert

Tax Alert - Government Proposal on CFC Rules

On 1 November 2018, the Finnish Ministry of Finance published a government proposal amending the current domestic controlled foreign company (CFC) rules. The proposed amendments are based on the EU Anti-Tax Avoidance Directive (2016/1164) and would broaden the scope of the current rules.

The new rules would be applicable for financial years ending on or after 1 January 2019.

Key features of the proposal

The proposed CFC rules are, in many ways, stricter compared to both the requirements of the Directive and to the current domestic CFC rules. The key features of the government proposal are as follows:

  • The current entity approach would be remained which means that the taxable CFC income is not divided into active and passive income or income arising from non-genuine arrangements. In other words, if an entity is deemed as a CFC, the total income of that entity is taxed as CFC income.
  • Entities with an effective tax rate of less than 3/5 of the domestic tax rate (i.e. 60%, resulting in a threshold of 12% with Finland’s current corporate income tax rate of 20%) would continue to be considered as being subject to low taxation.
  • A stricter participation threshold of 25% would apply (direct or indirect control of a Finnish taxpayer together with its related parties, foreign or domestic), which would widen the scope of the rules significantly. Under the current CFC rules, it is required that Finnish taxpayers (related or unrelated) control at least 50% of the CFC.
  • EEA resident companies with substantive economic activities would be excluded from the scope of the CFC rules in accordance of the minimum requirements of the Directive. A substantive economic activity should be supported by staff, equipment, assets and premises. Please note that the current exemption applicable to tax treaty resident companies would be abolished.
  • Outside EEA, only certain types of industries would be exempt. This exemption includes industrial and comparable production or service activities, shipping activities, and sales and marketing activities related to such activities. This exemption is based on the current industry exemption, but service activities are presented as a new addition to the provision. In addition, sales and marketing activities do not need to be mainly targeted to the area of the resident country of the foreign entity, as it is currently.
  • For the non-EEA exemption to apply, adequate exchange of information procedures would need to be in place between Finland and the other state, and the other state may not be on the EU’s so-called black list in the current or previous tax year.
Implications of the amendments

The proposed amendments would expand the scope of the Finnish CFC rules. Especially the abolition of the current exemption applicable to tax treaty resident companies outside EEA could bring several new foreign entities under the scope of the CFC regulation. In the future also genuine business activities in non-EEA countries may be classified as CFCs.

The amended industry exemption outside EEA introduces questions of interpretation as to which service activities would be exempt. According to the proposal, these would be e.g. information technology services and digital solutions. It is specifically stated in the proposal which services may not be exempt; these would be financial services e.g. investment management, services related to ownership and sales of intellectual property or other intangible assets, and intra-group financing or insurance services.

The new CFC rules based on the Directive will be implemented across all EU Member States by 1 January 2019. It should be carefully monitored what kind of CFC legislation other Member States are going to implement and analyze also their effects. Furthermore, for Finnish tax purposes it should be found out whether there are adequate exchange of information procedures in place with Finland and the state of residence of the possible CFC. We recommend that groups of companies assess their international structures and identify possible changes in their CFC exposures.

More global tax news
& views

Visit tax@hand


Oliko tieto hyödyllistä?