Draft Goverment proposal on CFC rules and general anti-abuse rule

D&I Alert

Posted on

8 Aug


Dittmar & Indrenius > Insight > Draft Goverment proposal on CFC rules and general anti-abuse rule

The Draft Proposal

Ministry of Finance has issued a draft government proposal on controlled foreign company (“CFC”) rules, implementing the CFC rules of the Anti-Tax Avoidance Directive (2016/1164, the “Directive”). Additionally the proposal addresses the general anti-abuse rule (“GAAR”) of the Directive.

The proposed CFC rules, which would enter into force at the beginning of 2019, are in many ways stricter compared to both the requirements of the Directive and to the currently applicable CFC rules.

Overview of Proposed CFC Rules

Controlled foreign company rules effectively re-attribute the income of a low-taxed controlled subsidiary to its direct or indirect parent company.


Whereas the current CFC rules require that at least 50% of the CFC is controlled by Finnish taxpayers (related or unrelated), the Directive requires that a Finnish taxpayer together with its associated enterprises (foreign or domestic) holds at least a 50% participation in the CFC.

The Finnish proposal takes this requirement further and proposes a participation threshold of 25% for the CFC rules to apply.

Level of Taxation

The Directive would classify entities with an effective tax rate (“ETR”) of less than 50% of the domestic tax rate as being subject to low taxation (calculated in accordance with the rules of the Member State of the controlling company).

The Finnish proposal imposes a stricter threshold of 60% (resulting in an ETR threshold of 12% with Finland’s current corporate income tax rate of 20%).

Taxable CFC Income

The Directive provides member states with two alternative frameworks for determining the taxable CFC income, which would include:

(a) specific passive income (such as interest, royalties and dividends); or
(b) income arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.

The draft proposal does not directly follow either of the models proposed by the Directive but instead applies a combination of the non-genuine arrangements rule with the currently applicable Finnish CFC rules. In brief, any low-tax entity that is controlled by Finnish taxpayers may be subject to the CFC rules, unless one of the exemptions applies.

Exempted Activities

The draft proposal follows the Directive’s framework of excluding EEA resident companies with genuine economic activities from CFC taxation.

However, outside the EEA, all genuine business arrangements are not outside the scope of CFC rules. The new rules would exempt only companies the income of which mainly arises from industrial or other comparable production activities, shipping activities, as well as sales or marketing activities related to such exempt activities. In addition, adequate exchange of information procedures need to be in place between Finland and other state for the exemption to apply.

It is important to note that the current exemption applicable to tax treaty resident companies would be abolished. Consequently, the effective level of taxation of such non-EEA resident companies would need to be monitored.

Contrary to the currently applicable CFC rules, which have required that the sales and marketing activities could only be performed in the company’s state of residence in order for the exemption to apply, the new CFC rules would also exempt regional sales and marketing hubs from the applicability of the rules, provided that the operations relate to industrial production. This change will provide more flexibility for companies with regional activities.

All in all, the new rules extend the scope of the current CFC rules and also include stricter rules than those required by the Directive.

General Anti-Abuse Rule

General anti-abuse rules feature in tax systems to tackle abusive tax practices that have not yet been dealt with through specifically targeted provisions.

Pursuant to the GAAR of the Directive, for the purposes of calculating the corporate tax liability, Member States shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances.

Finnish domestic legislation includes a GAAR which, despite its different wording and structure, has broadly the same purpose as the GAAR of the Directive. Despite ongoing discussions regarding the comparability of the two GAAR provisions, the Finnish Ministry of Finance concluded that the currently applicable domestic GAAR meets the requirements of the GAAR of the Directive, acknowledging that the domestic GAAR may be stricter in certain situations.

Therefore no changes are proposed under the draft to the currently applicable GAAR due to the Directive.


Proposed amendments significantly expand the scope of application of the CFC rules and could lead to somewhat arbitrary CFC implications e.g. to companies with genuine business operations outside the EEA.

Especially the inclusion of a specific list of exempted activities compared to the Directive’s approach of exempting all genuine activities will likely cause issues to numerous taxpayers as in some cases also genuine business operations subject to low taxation in non-EEA countries may classify as CFCs under the new rules.

The extension of the scope of the sales and marketing exemption would enhance structuring options for many groups operating with regional activities.

The proposed rules, which would enter into force on 1 January 2019, are currently under public consultation and are subject to change.

It is recommendable for companies to assess the impact of the proposed changes to their current structures. We are happy to discuss the proposed changes with you and keep you updated with the development of the legislative process.

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