October 2024
New tax practice from the SAC regarding trusts
In Anglo-Saxon jurisdictions, trusts are commonplace and are often used to hold and manage property in the interest of other persons, often a spouse or children, called beneficiaries. Trusts come in many different forms and they are established for a number of reasons. In the absence of common law rules or any specific trust legislation – and also in view of the scarce amount of published tax practice in Finland – the Finnish tax treatment of trusts may be arbitrary. A common interpretation is to deem trusts predominantly as only abusive tax shelters. Thus, it is often advisable to apply for an advance ruling from the Tax Administration of Finland before establishing a tax residency in Finland or before creating a trust.
On 10 September, 2024, Finland’s Supreme Administrative Court (hereinafter the SAC) issued a precedent (KHO:2024:100) dealing with the Finnish tax implications of transferring assets (shares of a Finnish limited liability company) to a Guernsey law trust. In this case, A and A’s spouse, both Finnish tax residents, had planned to create a trust in accordance with Guernsey law and had initially applied for an advance ruling from the Finnish Tax Administration.
According to Guernsey trust law, a trust is not a separate legal entity and has no legal competency. Based on a settlement agreement, the intention is that A and A’s spouse would transfer to the trust 61.7 per cent of all the shares of B Oy. The transferred shares would have no voting rights, but the rest of the shares (those with voting rights) would remain in the possession of A and A’s family. However, as a result of this transfer, A and A’s spouse, as the settlors of the trust, would no longer have legal ownership of the shares. The trust is irrevocable: when the assets are settled, the settlors can no longer reacquire the assets.
The plan is that a trustee would obtain legal ownership of the assets held in the trust. The trustee would also administer the assets for the benefit of the beneficiaries in accordance with the settlement agreement and trust law, and, for example, determine how the income in the trust is to be reinvested. Professional corporate trustees, most often used in Guernsey, are administered and supervised by the Guernsey Financial Services Commission. The beneficiaries of the trust would be the settlors’ children and their living and unborn descendants. Under the agreement and at the discretion of the trustee, the beneficiaries may receive assets from the trust to support their education, and to establish business or sports careers. The trust is intended to last in perpetuity.
The SAC was asked to judge whether the transfer of shares to the trust will be taxed as A’s and A’s spouse’s capital income from the alienation of the shares. According to the SAC, the Guernsey trust is comparable to a corporate entity for Finnish tax purposes and can be considered as “other sets of assets that have been dedicated for a special purpose”. The transfer of the assets has been deemed by the SAC as a capital investment in the trust and an alienation of shares for tax purposes. The SAC came to the decision that, in this case, the transfer will not trigger gift tax consequences for the beneficiaries, since the shares have been transferred on the basis of a settlement deed rather than e.g. a deed of gift.
On 10 September, 2024, Finland’s Supreme Administrative Court (hereinafter the SAC) issued a precedent (KHO:2024:100) dealing with the Finnish tax implications of transferring assets (shares of a Finnish limited liability company) to a Guernsey law trust. In this case, A and A’s spouse, both Finnish tax residents, had planned to create a trust in accordance with Guernsey law and had initially applied for an advance ruling from the Finnish Tax Administration.
According to Guernsey trust law, a trust is not a separate legal entity and has no legal competency. Based on a settlement agreement, the intention is that A and A’s spouse would transfer to the trust 61.7 per cent of all the shares of B Oy. The transferred shares would have no voting rights, but the rest of the shares (those with voting rights) would remain in the possession of A and A’s family. However, as a result of this transfer, A and A’s spouse, as the settlors of the trust, would no longer have legal ownership of the shares. The trust is irrevocable: when the assets are settled, the settlors can no longer reacquire the assets.
The plan is that a trustee would obtain legal ownership of the assets held in the trust. The trustee would also administer the assets for the benefit of the beneficiaries in accordance with the settlement agreement and trust law, and, for example, determine how the income in the trust is to be reinvested. Professional corporate trustees, most often used in Guernsey, are administered and supervised by the Guernsey Financial Services Commission. The beneficiaries of the trust would be the settlors’ children and their living and unborn descendants. Under the agreement and at the discretion of the trustee, the beneficiaries may receive assets from the trust to support their education, and to establish business or sports careers. The trust is intended to last in perpetuity.
The SAC was asked to judge whether the transfer of shares to the trust will be taxed as A’s and A’s spouse’s capital income from the alienation of the shares. According to the SAC, the Guernsey trust is comparable to a corporate entity for Finnish tax purposes and can be considered as “other sets of assets that have been dedicated for a special purpose”. The transfer of the assets has been deemed by the SAC as a capital investment in the trust and an alienation of shares for tax purposes. The SAC came to the decision that, in this case, the transfer will not trigger gift tax consequences for the beneficiaries, since the shares have been transferred on the basis of a settlement deed rather than e.g. a deed of gift.
Legal Disclaimer
The information in this site has been prepared for general informational purposes only and it should not be used as a substitute for consultation with a professional tax, legal or other competent advisor. While we have made every attempt to ensure that the information contained in this site has been obtained from reliable sources, Effektiivi Oy is not responsible for any errors or omissions, or for the results obtained from the use of this information.
The information in this site has been prepared for general informational purposes only and it should not be used as a substitute for consultation with a professional tax, legal or other competent advisor. While we have made every attempt to ensure that the information contained in this site has been obtained from reliable sources, Effektiivi Oy is not responsible for any errors or omissions, or for the results obtained from the use of this information.
