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Finland fills the gaps in tax legislation - impact on non-resident real estate investors

With the parliamentary elections looming in a few months, the Finnish Government has stepped on the gas pedal to ensure it can enact tax laws aiming to seal the Finnish tax base in accordance with the Government Programme of 2019. Unfortunately, not all reforms are seen in as positive a light as the Government is making it seem.

In September 2022, the Finnish Ministry of Finance published two new bills affecting the Finnish real estate investments of non-resident investors. One of the bills expanded the concept of Finnish-source income to cover the indirect disposal of Finnish real estate. The other bill introduced a flow-through tax model for certain real estate funds.

Although argued to be purely technical amendments, both reforms are in fact fundamental changes to the Finnish tax system and will affect many non-resident real estate investors.

Capital gains tax on indirect real estate investments

So far, under the current Finnish tax regime, capital gains received from the sale of indirect real estate investments in Finland have not been subject to Finnish tax unless sold by a Finnish shareholder. Consequently, foreign investments in Finnish real estate have typically been implemented via a holding company structure that can then be sold without triggering Finnish capital gains taxation.

As of 2023, the new rules will allow the taxation of capital gains accrued by foreign investors that have invested in Finnish real estate indirectly via another company, be that company Finnish or foreign. As long as more than 50% of the underlying assets consist of Finnish real estate, the capital gains tax will be imposed regardless of the complexity of the ownership chain.

Although certain tax treaties restrict the applicability of the new rules and, for example, publicly traded shares are exempted, foreign investors should prepare for an increased tax and administrative burden when investing in Finnish real estate through a holding company structure.

Flow-through treatment for certain real estate funds

Another proposal put forward by the Finnish Ministry of Finance, which links with the above, seeks to reclassify certain real estate funds as flow-through entities for Finnish tax purposes. In consequence, income earned by a fund currently treated as a tax-exempt opaque entity in Finnish taxation would be directly taxed at the level of the fund investor regardless of whether the fund is domestic or foreign.

The new model would, in practice, apply to contractual funds and be applicable only to funds with 30 unitholders or less. However, the scope of application is still somewhat uncertain insofar as which foreign investment fund structures are concerned. If the new model does apply, its application would result in a Finnish tax reporting duty for all unitholders and the fund itself as well as a joint tax liability for Finnish taxes.

If the proposed changes pass into law, the new rules will, in most cases, result in the need to review existing investment structures as the administrative burden will increase drastically.

What next?

Both proposals are examples of the current Finnish Government’s desire to tackle aggressive tax planning with selective means that apply to targeted structures, while the legislation will affect a wide array of taxpayers without aggressive tax planning motives.

The outcome? Finnish tax legislation is becoming more and more complex, and simply ensuring compliance with the legislation will require more and more de rigueur use of tax advisors. We can only hope that the Government is not budgeting for an increase in tax revenues except via tax advisors’ increased taxable profits.


borenius, finland, tax, ekarhu, taxreform, finnishtaxsystem, nonresident, realestate, investors