An extract from The Private Wealth & Private Client Review, 9th Edition
Wealth structuring and regulationi Wealth structuring vehicles
Finnish law does not recognise the common law institution of trust. In addition, the use of foundations for wealth structuring purposes is very limited, because foundations are typically required to have a charitable purpose and they are subject to strict supervision enforced with even criminal sanctions. Limited partnerships, on the other hand, are mainly used by private equity investors and in other circumstances where the features of a transparent entity are desirable.
Thus, the most common vehicle for wealth structuring remains the limited liability company. As the taxation of dividends in the hands of an individual shareholder is affected by the value of the dividend-distributing company's net assets, accumulating property in a limited liability company is often advantageous from a tax perspective. Setting up a limited liability company is very straightforward and, as of July 2019, there is no required minimum incorporation capital. At least one member of the board has to reside within the EU or the EEA, unless a special permission is granted.
Another reason why corporations are an attractive vehicle for accumulating wealth is that invoicing through personal service companies or holding companies, especially in the field of professional services, may to some extent be used as an alternative to receiving the same amount of income as wages. As discussed above, earned income is taxed at rates of up to approximately 55 per cent, whereas the tax burden when charging through a corporation may be more modest – the corporate tax rate is 20 per cent and dividend distributions are often taxed at only 7.5 per cent. Depending on the circumstances, there might not even be a need to distribute dividends, resulting in ulterior tax savings.
Exit tax provisions introduced as of 2020 could trigger exit taxation, if managing the company from another country causes the company's residence to switch to that other country and Finland to lose the right to tax the company's assets. The February 2019 judgments of the Court of Justice of the European Union on the concept of beneficial ownership and misuse of EU law could limit the possibilities to utilise foreign intermediate holding companies (e.g., as vehicles for investment to Finland).
Legislative amendments aiming to better align the tax treatment of different forms of investment have been applied as of 2020. Among others, these amendments greatly reduced the attractiveness of insurance wrappers by, for example, abolishment of the possibility to withdraw invested capital without triggering taxation and complete forfeiture of tax deferral when the policy owner yields too close control over the underlying assets. For example, the explicit or implicit possibility to exercise voting rights in the underlying investment object or bypass the insurance company when giving purchase and sell orders ('self-management') cause complete forfeiture of tax deferral.
As of 2020, Finnish contractual investment funds have to meet certain conditions related to, for example, a minimum number of unit holders and open-endedness to be tax exempt. HNWIs, who tend to choose limited liability companies or insurance wrappers, rarely use Finnish investment funds as wealth structuring vehicles. For many HNWIs, foreign private funds could be a more attractive alternative, especially after the 2020 amendments.ii Regulation of financial service providers and prevention of money laundering
Marketing and offering of financial products and services in Finland by investment firms, and fund managers of both UCITS (i.e., funds established under the EU Directive on Undertakings for Collective Investment in Transferable Securities) and alternative investment funds (i.e., funds governed under the EU Directive on alternative investment fund managers) require prior authorisation or registration with the Finnish Financial Supervisory Authority, which is also the supervising authority. When marketing is directed to non-professional investors (retail investors), certain additional requirements, such as the obligation to provide a key investor information document and the rules under the Consumer Protection Act, apply. The definition of a professional client under the Investment Services Act is based on the requirements set out in the EU Directive on Markets in Financial Instruments (MiFID II).
Finnish legislation on the prevention of money laundering is largely based on international standards, which include the EU's Anti-Money Laundering Directives, which are based on recommendations of the Financial Action Task Force. The 4th Anti-Money Laundering Directive was implemented into Finnish legislation by the recast Act on the Prevention of Money Laundering and Financing of Terrorism (AML Act) and the Act on the Financial Intelligence Unit. Finland has also transposed the 5th Anti-Money Laundering Directive into national law. Requirements under the AML Act apply to, inter alia, investment firms, fund managers, credit institutions and other entities offering financing in Finland. The duties include identification and verification of customers, ongoing monitoring of customer relationships, record-keeping, detecting and analysing suspicious transactions and reporting suspicious transactions to the Financial Intelligence Unit, which operates in connection with the National Bureau of Investigation. Violations are subject to administrative and criminal sanctions, and negligence towards the obligations may lead to corporate criminal liability and criminal liability for individual employees. Money laundering offences are sanctioned in the Penal Code.