Finland plans to expand taxation rights concerning sale of real property

Taxation of income derived from the transfer of real property is planned to be extended to indirect transfers

On 3 August 2022, the Finnish Ministry of Finance published a draft government proposal to amend section 10 of the Finnish Income Tax Act. The new provisions would be applied from 1 January 2023.

Under the current legislation, Finland has the right to tax non-resident taxpayers of the income derived from the transfer of real property located in Finland. This applies also to shares in a Finnish limited liability company or cooperative society if more than 50 per cent of the assets in the limited liability company or cooperative society consist of one or more real properties located in Finland. However, the current legislation is not applicable to indirect transfers, and Finland does not therefore have taxing rights, for example, when a foreign company sells shares in a Finnish holding company that owns shares in a domestic real estate company. Finland also does not have the right to tax if the object of the transfer is shares in a foreign company that owns shares in a domestic real estate company. 

In the draft government proposal, the following changes are suggested to Section 10 of the Finnish Income Tax Act concerning income from a Finnish source:

• Income from an indirect transfer of real property would also be regarded as income from a Finnish source. As a result of the change, income treated as sourced to Finland could include, for example, income from the transfer of shares in a foreign company if the transferred company owned shares in another company owning real property in Finland. Finland would also have the right to tax if a foreign company sold a Finnish holding company that owns shares in a domestic real estate company. 
• The scope of the provision would not be limited only to certain types of companies. In addition to limited liability companies and cooperative societies, the provision could, for example, also be applied to other corporate entities and partnerships. 
• Indirect ownership, within the meaning of the provision, could be formed through several companies, and the companies in the ownership chain could be domestic or foreign companies. The scope of the provision would therefore not be limited, for example, to indirect holdings formed through only one holding company. 
• The provision would include a time limit of 365 days based on the OECD Model Tax Convention. This would mean that the 365 days preceding the transfer would be taken into account when calculating whether more than 50 per cent of the assets of the transferred company consist of real property located directly or indirectly in Finland. Due to the time limit, the provision could be applied, for example, in a situation where the amount of real property owned by the company to be transferred would be reduced in different ways before the transfer of the company’s shares so that the portion of real property located in Finland of all the assets in the company would fall below 50 per cent. 
• The shares of a company listed on the stock exchange would fall outside the scope of the provision.

Objectives and impact of the proposal

The aim of the proposed amendments is to enable Finland to exercise its right to tax indirect transfers of real property located in Finland that has been granted in a tax treaty. Currently, about half of the tax treaties concluded by Finland give the right to tax indirect transfers of real property. However, the number of such tax treaties is expected to increase in the future as Finland concludes new tax treaties and re-negotiates old ones. 

In the future, domestic legislation would make it possible to tax indirect transfers and tax treaties would restrict the exercise of the right to tax insofar as the tax treaties do not allow the taxation of indirect transfers. As a result of the amendments, the Finnish legislation concerning the taxation of transfers of real property would differ from the other Nordic countries, as the domestic legislation in the other Nordic countries does not give right to tax capital gains from the sale of indirectly owned real property, even if such a right is granted in a tax treaty.

Even if indirect transfers of real property were taxed in the future, regardless of the type of company, the applicability of the provision would nevertheless require that the seller could not be regarded as an entity exempted from tax in Finland. Due to the effect of EU law, foreign investment funds comparable to a Finnish tax-exempt investment fund, for example, would be excluded from Finland’s right to tax.

If implemented, the proposed amendments to section 10 of the Finnish Income Tax Act would create new questions of interpretation, such as, in which situations a foreign company would be considered to be a company owning taxable real property in Finland and, if a tax treaty restricts Finland’s right to tax, whether the company would be entitled to tax treaty benefits.