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Advance ruling on Finnish withholding tax and EC Law re Luxembourg SICAV — Orbitax Tax News & Alerts

The Finnish Central Tax Board (Keskusverolautakunta, or KVL) issued an advance ruling on 25 January 2006 (KVL 2/2006) in a case regarding Finland's right to impose, under EC law, withholding taxes on Finnish-source dividends received by a Luxemburg SICAV from its 100% owned subsidiary in Finland. The main features of the ruling are summarized below:

(a) Decision. The KVL first stated in its decision that, as a SICAV is not referred to in the Appendix to the EC Parent-Subsidiary Directive (90/435/EEC) and it does not pay corporate tax in Luxemburg, it is not considered to be qualifying company under the Directive. For this reason, it is not exempt from withholding tax under the Finnish domestic rules implementing the Directive.

The taxpayer's main arguments, however, focused on the fundamental freedoms of the EC Treaty. It reasoned that the EC Treaty precluded Finland from imposing withholding taxes on the dividend, as similar dividends received by Finnish resident limited liability companies or investment funds would have been tax free. In its answer to this argument, the KVL stated that, for Finnish purposes, a Luxemburg SICAV resembles mostly Finnish limited liability companies (osakeyhtiö), rather than, for example, investment funds. Due, however, to the differences between these two legal forms, the KVL found the situations of resident and non-resident taxpayers not to be objectively comparable. Following this, the KVL ruled that the EC Treaty does not prohibit Finland from levying withholding taxes on the dividends received by the SICAV.

(b) Comment. The ruling is not yet final and the taxpayer may appeal the case to the Finnish Supreme Administrative Court, which, unlike the KVL, can refer the case to the European Court of Justice (ECJ).