Relaxing taxes

In the past, Finnish private equity and venture capital funds were unattractive to foreign investors. This is because most private equity funds are structured as partnerships that are not treated as separate tax subjects but as an accounting unit, so profits are taxed as income of the partners. According to the Finnish Supreme Court, foreign investors acting as partners in Finnish limited partnerships had to be based Finland. As a result, investments in funds were taxed according to Finnish laws, which resulted in adverse tax effects for foreign investors. After realising the problem, the parliament enacted an amendment to relax the taxation environment. The amendment came into effect from January 2006 and enabled a non-residence partner’s share of profits received through a Finish partnership to be taxed as if the investor had invested directly in the target company. In other words, taxed like any other shareholder and not taxed on capital gains or interest in Finland. Only paid divided would be subject to taxation of non-resident partners. This taxation depends on the treaty between the investor’s country of residence and Finland. Currently, Finland has about 60 treaties with countries that are members of the EU, but also a few non-member states. The amendment states that the fund must practice venture capital business in a manner prescribed by the Finnish Income Tax act. This involves investing in unquoted companies, growing them and selling the shares acquired in target companies within a limited time frame. “The Finnish authorities put more relaxed tax rules into play to boost foreign direct investments,” says Janne Juusela, a partner at Finnish law firm Borenius & Kempinnen who specialises in tax. Although the new law is more relaxed than that of Sweden, the Finnish private equity market continues to attract far less international capital than its neighbour. “The legislation is definitely a step in the right director, and the Finnish Venture Capital Association is continuing to lobby further flexible tax treatments of international investors,” Juusela says. “Finland’s greatest impediment to attracting foreign capital, however, is track record.” Sweden is the leader among the Nordic countries and has a solid reputation of breeding good companies and having experienced investors that make good investments. Denmark is the most relaxed of the Nordic countries in terms of the treatment of international capital, but even the Danes are running into the same track record issue as the Finns. Still a way to go “Despite the improved environment for international investors, we still have to overcome two major obstacles to make the Finnish market more open to foreign investments,” says Juusela. The first thing he points out is to employ a neutral tax system. This enables all international investors, regardless of the treaty between Finland and the investor’s home country, to invest in Finland and be taxed on income tax, rather than capital gains tax. Funds-of-funds also run into problems. “The new regime cannot, in practise, be applied to the funds-of-funds that want to invest in Finland,” Juusela says. Investment opportunities may therefore be lost because of the unfavourable tax treatment applied to these funds-of-funds. Secondly, withholding dividends continues to be a problem. Unless, The dividends tax rate is 28%, unless the investor comes from a country that has a treaty with Finland when is decreases to 10-15%. “Withholding tax treatment continues to be a problem and should be amended to make the 10-15% ruling for all investors that want to invest in Finnish funds. This will foster private equity and we will gain a stronger foothold in the European market,” Juusela concludes.

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• Topics
• Regulation
• Nordics