The Finnish CFC Regime and Foreign Investment Funds : Control, Substance, Form, and EU Law Limits in Cross-Border Fund Structures

This study examines the application of the Finnish CFC regime to foreign investment funds in cross-border private equity fund-of-funds structures. The analysis in this study focuses on the interpretation of the substance exemption and its interaction with EU law and relevant private law considerations. CFC provisions were designed to prevent artificial profit shifting by attributing income of low-taxed foreign corporate entities to resident taxpayers exercising majority control. These objectives were incorporated into EU law through global efforts to counteract profit shifting and base erosion. The Finnish CFC regime is an implementation of EU law, whereby underlying objectives of EU primary law should be considered in levying tax in Finland based on income attribution. The Finnish CFC regime applies an entity-based and ownership-driven attribution approach founded on assumptions that misidentify control, income generation, and timing in fund-of-funds structures, leading to over-inclusion incompatible with EU law constraints. Indicators used in the entity-based assessment do not correspond to the legal and economic characteristics of modern investment fund structures or the economic activities. In private equity investments, the investment is often conducted through fund-of-funds structures where ownership, governance, control, and economic risk are separated. CFC regimes were designed to target non-genuine arrangements in a corporate setting and the application should be limited to wholly artificial arrangements. The study demonstrates that the application of the Finnish CFC regime to cross-border fund-of-funds structures in private equity activities may lead to the inclusion of income generated through genuine economic activity, potentially leading to taxation that may be difficult to reconcile with the objectives of EU law. The concept of attributing income from a foreign entity to a resident taxpayer with controlling interest, creates a concrete intersection of various fields of law each intended to protect different legal interests. This study therefore also concerns the compatibility of the Finnish CFC regime with the objectives of ATAD and EU primary law by providing context from traditional private law. The findings of this study suggest that the national interpretation of the substance exemption does not fully resolve this tension. Unclear criteria for tax treatment may lead to uncertainty and potential risk for disputes in cross-border investment activities. The study concludes that a more coherent approach would be required to ensure alignment between the Finnish CFC regime, EU law and the economic realities of modern investment activities carried out through fund structures.