Global Tax Alert. Executive summary. News from EU Tax Services

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1 12 February 2015 Global Tax Alert News from EU Tax Services EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Services/Tax/International- Tax/Tax-alert-library#date Finnish Supreme Administrative Court holds dividends paid to a US RIC exempt from Finnish withholding tax based on EU free movement of capital in a second case Executive summary On 13 January 2015, the Finnish Supreme Administrative Court (the Court) rendered its decision on two different cases concerning the withholding tax treatment of dividends distributed by Finnish publicly traded companies to two different types of US resident regulated investment companies (RICs), a publicly traded closed-end Delaware Statutory Trust and a non-publicly traded open-ended Massachusetts Business Trust, that had filed a reclaim at the level of its sub-fund. The first case regarding the publicly traded closed-end RIC was published and reported on in a previous Global Tax Alert. 1 The second case considering a nonpublicly traded open-ended RIC was not published and therefore not originally reported. In both cases, the Court confirmed that dividends payable to a US resident recipient should be exempt from withholding tax where the dividends would be tax-exempt when paid to a Finnish comparable resident recipient under the European Union (EU) principle of free movement of capital of Article 63 TFEU (Treaty on the Functioning

2 of the European Union). However, the reasoning for the granted withholding tax exemption was different due to the basis of comparability of the applicants to Finnish resident recipients in each case. This Alert summarizes the holding of each decision. Detailed discussion Finnish law only recognizes mutual funds established on a contractual basis. Finnish mutual funds have no separate legal personality, whereas a RIC is considered a separate legal entity. Finnish mutual funds are, however, considered separate tax subjects although the funds are specifically tax-exempt from income tax under a Finnish domestic law provision. Finnish law also only recognizes open-ended funds. Dividends distributed to a subfund of an open-ended RIC The second, unpublished Supreme Administrative Court case addressed the withholding tax treatment of dividends distributed by Finnish listed companies to a sub-fund of a US resident Massachusetts Business Trust, an open-ended RIC. The applicant in the second case was a sub-fund of Massachusetts Business Trust. The Massachusetts Business Trust was a series fund, consisting of several sub-funds, and it had been established on contractual basis, even though it had legal personality. The sub-fund was open ended, had its own assets and the investors invested their assets specifically at the level of the sub-fund. The quotation of the fund units was communicated to the investors through the New York Stock Exchange (NYSE) though the fund units were not publicly traded. The fund could redeem units from its investors. The Court stated that the subfund has no legal personality, even though it does have some features that would suggest so, and it is treated as a separate taxable entity though in practice it was not in a tax-paying position. However, the Court highlighted that the applicant was merely a sub-fund of the Massachusetts Business Trust, which in turn does have legal personality, contrary to the position of its sub-fund. As the functional profile and also the juridical position of the sub-fund seemed to correspond to those of a Finnish mutual fund, the Court concluded that the sub-fund should objectively be held comparable to a Finnish investment fund. Hence, as the sub-fund was deemed to be comparable to a tax-exempt Finnish investment fund, levying withholding tax was deemed to be in breach of the principle of free movement of capital of Article 63 TFEU. The restriction could not be justified by the need to guarantee fiscal supervision due to the tax treaty provisions on the exchange of information in place between Finland and the state of residence of the dividend recipient. Dividends distributed to a publicly traded RIC In the published case, the Supreme Administrative Court addressed the withholding tax treatment of dividends distributed by Finnish listed companies to a US resident Delaware Statutory Trust, a closedend regulated investment company (RIC). The shares of the RIC were listed on the NYSE. The Court recognized certain legal and functional similarities between a Finnish mutual fund and the RIC; however, the Court concluded that the RIC is objectively comparable to a Finnish limited liability company instead of a Finnish mutual fund. As the RIC was deemed comparable to a Finnish limited liability company, no withholding tax on dividends distributed by Finnish listed companies to the RIC could be levied pursuant to the principle of free movement of capital, as the dividends would have been exempt from tax for a Finnish listed recipient and tax treaty provisions on the exchange of information were in place between Finland and the state of residence of the dividend recipient. 2

3 Implications The Court confirmed that the EU principle of free movement of capital precludes levying withholding tax on dividends paid to recipients established in non-eu member states, where the dividends would be taxexempt in a corresponding domestic situation. Based on the two cases, both EU and non-eu residents may be entitled to receive Finnish-source dividends exempt from withholding tax, provided that sufficient comparability may be deemed to exist, and that dividends would be tax-exempt in a corresponding domestic situation. After the two decisions from the Court, both publicly traded RICs and non-publicly traded RICs should be entitled to a withholding tax exemption. The statute of limitations for withholding tax purposes is five years under Finnish law. Hence foreign funds may apply for a refund of withholding taxes levied in 2010 or later. A foreign fund may also apply for an advance ruling on the withholding tax treatment of Finnish source dividends to confirm the withholding tax treatment of dividends in advance. Endnote 1. See EY Global Tax Alert, Finnish Supreme Administrative Court holds dividends to a US RIC exempt from Finnish withholding tax based on EU free movement of capital, dated 15 January

4 For additional information with respect to this Alert, please contact the following: Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich Dr. Klaus von Brocke Ernst & Young Oy, Helsinki Kennet Pettersson Tomi Viitala Laura Lahdenperä

5 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. EU Competency 2015 EYGM Limited. All Rights Reserved. EYG No. CM5202 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com