The Finnish CFC legislation implies that a Finnish company may be subject to income tax for its share of the profit of a CFC regardless of whether these profits are distributed by the CFC to its shareholders or not. A CFC is defined as a foreign corporation owned and controlled by a Finnish tax resident that pays income tax in its domicile at a rate less than 60% of the Finnish corporate income tax rate.
On 20 March 2002 the Finnish Supreme Administrative Court issued a ruling concerning the applicability of the Finnish CFC legislation in a situation where a Finnish parent Company had a Belgian subsidiary (KHO 2002:26). In this ruling the Supreme Administrative Court stated that the Finland-Belgium double taxation convention did not prevent the application of the Finnish CFC rules to the Belgian subsidiary. In addition, the Court held that the rules did not amount to a restriction on the freedom of establishment within Article 43 EC or on the free movement of capital within Article 56 EC. Consequently, the profits of the Belgian subsidiary were taxed at the level of the Finnish parent company according to the Finnish CFC rules.
The ECJ delivered its judgment in the Cadbury Schweppes case (Case C-196/04, Cadbury Schweppes plc and Cadbury Schweppes Overseas LTD) on 12 September 2006. The Court recalled that companies or persons could not improperly or fraudulently take advantage of the provisions of Community law. However, the fact that a company has been established in a Member State for the purpose of benefiting from more favourable legislation does not in itself suffice to constitute abuse of the freedom of establishment and does not deprive of the right to rely on Community law. The ECJ noted that the CFC legislation involves a difference in the treatment of resident companies on the basis of the level of taxation imposed on the company in which they have a controlling holding. That difference in the treatment creates a tax disadvantage for the resident company to which the CFC legislation is applicable. The CFC legislation therefore constitutes a restriction on the freedom of establishment within the meaning of Community law, on condition that the actual establishment is intended to carry on genuine economic activities in the host Member State.
After this judgment by the ECJ the Finnish parent company started proceeding for the reversal of the legally final ruling by the Supreme Administrative Court. The Supreme Administrative Court noted, among other things, that the compatibility of the Finnish CFC legislation with Community law was open to interpretations at the time of the first ruling. Because the Supreme Administrative Court had not referred the case to the ECJ there was a procedural fault which could have essentially influenced the first ruling.
The Belgian subsidiary was actually established in the host State and carried on genuine economic activities there, in the same meaning as in Cadbury Schweppes case. As a consequence, the ruling by the Supreme Administrative Court was in conflict with Community law. Therefore, on 11 April 2011 the Supreme Administrative Court issued a new precedent (KHO 2011:38) where it reversed its own ruling and referred the matter back to the Tax Administration.
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