Finland’s decision to classify dividend profits as employment income rather than capital income based on the type of collective investment undertaking is discriminatory under EU law, an advocate general has said.
Advocate General Gerard Hogan issued his opinion November 19 in E v. Finland, C-480/19, regarding Finland’s practice of treating SICAVs, investment funds established in Luxembourg, as companies under Finnish law for the purpose of taxing distributed income as employment income. He interpreted articles 63 and 65 of the Treaty on the Functioning of the European Union to determine whether that practice constitutes discriminatory taxation for purposes of EU rules on free movement of capital.
Hogan urged the Court of Justice of the European Union to find that paragraph 33(c)(3) of Finland’s Income Tax Law, which qualifies profits distributed by foreign funds as employment income, violates EU law because it allows for Finnish tax authorities to tax dividends paid by SICAV investment funds as employment income solely because the fund does not meet the conditions under paragraphs 33(a) and 33(b) of the Finland’s Income Tax Law. Hogan said that the “Finnish tax law has established a restriction pursuant to Article 65 TFEU, which cannot be proportionate to any overriding reason relating to the public interest.”
E, an individual residing in Finland, invested in a SICAV that was a sub-fund of an undertakings for collective investment in transferable securities investment fund established in Luxembourg, and received investment income from the fund annually. In June 2018 E requested that the Finnish tax authorities clarify whether the income distributed from the SICAV should be taxed as capital income or employment income. The tax authorities said that any profit distributed from the SICAV should be taxed as employment income. The tax authorities argued that the profit distributions should not be treated differently from profits from Finnish investment funds just because a SICAV is not subject to corporation tax in Luxembourg and doesn't meet the conditions set out in Finland's Income Tax Law.
E argued that classifying the profits distributed as employment income is discriminatory because it leads to higher taxation for its shareholders than for Finnish shareholders, claiming that it is contrary to the free movement of capital. The opinion notes that Finland’s tax rates for capital income are 30 percent for income below €30,000 and 34 percent for income above €30,000, while employment income is taxed at progressive rates that can exceed 50 percent. Finland’s Supreme Administrative Court referred the case to the CJEU for clarification in its June 24, 2019, request for a preliminary ruling.
Hogan reasoned that the classification of profit “turns solely on the identity and residence status of the foreign entity and not on the question of whether these profits would otherwise run the risk of double taxation.” According to Hogan, “One cannot realistically say that income that does not meet these conditions should automatically be reclassified as employment income.” Hogan highlighted that even paragraph 32 of the Income Tax Law says that dividends paid by corporations constitutes capital income, not employment income.
Hogan also found that, even though there is direct discrimination in excluding foreign corporations from the scope of paragraphs 33(a) and 33(b), the objective is to ensure that income distributed by foreign tax funds that has already been taxed at the source can avoid double taxation. Therefore, these provisions of Finnish national legislation do not violate EU law.
Hogan noted that there is no direct or indirect discrimination in paragraph 32 because foreign investment funds “without legal personality” are treated the same way as similarly situated Finnish investment funds. He emphasized that whether a Luxembourg-based SICAV carries out the same activities as a Finnish mutual fund is irrelevant to classifying the income as capital. Hogan said the comparability of situations relating to discriminatory practices cannot be assessed in an abstract manner, explaining that the comparison must be made with consideration of the aim of the tax measure.