The Finnish Parliament has approved the government proposal concerning the taxation of non-residents’ capital gains arising from the disposal of shares in either a Finnish or non-Finnish holding company that indirectly owns real estate in Finland. The new legislation is expected to enter into force on 1 March 2023 and will be applied to all disposals carried out after that date.
Up till now, capital gains arising from indirect disposals of Finnish real estate by a non-resident of Finland has not been taxed at all in Finland. However, the approved amendments to section 10 of the Finnish Income Tax Act and the removal of the reservation made to article 9 of the Multilateral Convention (“MLI”) will change this.
In accordance with the government proposal, profits derived from the disposal of shares or similar rights in a holding company will be subject to tax in Finland if more than 50 per cent of the total assets of the company consist, directly or indirectly, of Finnish real estate. The application of the provision includes a time limit of 365 days based on the OECD Model Tax Convention. Accordingly, where at any point of time during the preceding 365-day period of the disposal more than 50 per cent of the assets of the transferred company consist of Finnish real estate, the indirect disposal is taxable in Finland in all respects.
Further, to extend and facilitate its taxing rights with respect to indirect real estate disposals, Finland has decided to withdraw its reservation to article 9 of the MLI concerning the taxation of capital gains arising from transfers of shares or other interest in entities deriving value mainly from real estate located in Finland. The amendments to the MLI will be applicable from the beginning of 2024.
With that said, from a tax treaty perspective, the withdrawal of the reservation to the article 9 is nonetheless effective only in relation to and against countries that also apply article 9 of the MLI. Hence, and despite of the changes to domestic tax legislation, an applicable tax treaty may still in individual cases prevent Finland from taxing indirect real estate disposals.
As a consequence, we recommend reviewing the effects of the new legislation on Finnish real estate investment structures and future disposals.