Fund Taxation Alert 2022-05

The Court of Justice of the European Union (“CJEU”) concluded on 7 April 2022 that a French corporate-form fund was in a comparable position with a Finnish contractual-based fund, meaning that the Finnish statutory investment fund tax-exemption regime, that applied solely to contractual-based investment funds, was contrary to the EU principle of free movement of capital.

The French fund appealed to the Finnish Administrative Court after a “negative” advance ruling by the Finnish tax administration. The ruling considered that the French real estate investment fund, established as an investment company with a variable capital (Societe Civiles de Placement Immobilier Capital Variable—SCPI), could not qualify for the Finnish statutory investment fund tax-exemption regime because it applied solely to contractual-based funds and, in this matter, the French fund was a corporate-form fund. The Finnish Administrative Court stayed its proceedings and referred the case to the CJEU.

The CJEU based the reasoning of its judgment on the following:

• The requirement of the contractual form is conducive to discouraging foreign investment funds from investing in Finland and, thus, position Finnish investment funds in a more favorable position (although the requirement of contractual form can be also fulfilled by foreign funds). With this finding, the CJEU seemed to recognize the existence of indirect discrimination.
• A foreign corporate-form fund that is fiscally transparent or tax-exempt in its residence state is in a comparable position with Finnish contractual-based funds that are part of the tax-exemption system (a system that seeks to place investments made through investment funds in a similar position with direct investments for tax purposes). In essence, the CJEU reaffirmed that the comparability assessment needs to consider the purpose and aim of the relevant domestic rules.

The judgment is a landmark decision and is expected to change the Finnish non-resident investment fund tax practice.

This is important in the light of the fact that the Finnish tax authorities were denying reimbursement of the withholding to certain types of corporate funds (i.e., non-listed corporate funds), by using the legal form as the criterion to affirm the non-comparability of foreign funds with Finnish funds.

This decision finally clarified that the legal form of an investment fund should not create such an objective difference that would justify a different tax treatment between corporate-form and contractual-based investment funds, which should have a positive impact on all the non-listed SICAV cases that are currently pending before the tax authorities.

One final aspect to consider and monitor in the future is the potential impact that the decision will have on the possibility to access the relief at source procedure by non-listed SICAVs.