Finnish court clarifies definition of tax evasion Finnish court clarifies definition of tax evasion

Finnish court clarifies definition of tax evasion
11 Apr 2018

A recent ruling by a Finnish court has provided more clarity on what activities are classed as tax evasion in relation to limited liability companies.

Regulations have traditionally stipulated that any dividends distributed to individuals working for a limited liability company are to be considered as earned income. But according to Uutiset, Finland’s Supreme Administrative Court has now expanded its interpretation to declare that, even capital income from a limited partnership company that is paid to the limited liability company acting on behalf of a partner, should still be thought of as that individual’s earned income for work performed.

Tero Määttä, lead tax specialist of the Finnish Tax Administration Vero, said: "The ruling reinforces the tax administration’s established taxation practice guidelines so, in practice, it will not result in any changes to implementation of the provision. The decision clearly indicates that the scope of the provision for work-based dividends is extensive."

The ruling was based on the review of a case in which a doctor worked at a limited partnership firm and was paid via a limited liability company. The court found that the business model used by the medical practice’s limited partnership company was artificial and unsubstantial. In fact, it indicated that the only benefit for shareholders would have been the anticipated taxation gains. As a result, it was charged with tax evasion.

The tax administration spokesman said he had no information about the number of similar cases that were being prosecuted in the courts but speculated they were rare.

Back in 2014, the then health and social affairs minister Laura Räty came under scrutiny for adopting arrangements to declare taxable additional income as tax-free dividends. The practice reportedly continued for a period of four years while she worked as a physician.

Between 2007 and 2011, Räty reportedly pocketed roughly €20,000 (US$24,486) in additional income, declared as dividends from a firm known as DocOne, in which a company she owned was a shareholder.

Had Räty declared this income as salary on top of additional earnings from the Helsinki-Uusimaa hospital district HUS, she would have had to hand over more than half of the entire sum in taxes and other statutory contributions. But the practice was not illegal at the time, and Räty later said she would not do the same thing again.

Emma

Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.

A recent ruling by a Finnish court has provided more clarity on what activities are classed as tax evasion in relation to limited liability companies.

Regulations have traditionally stipulated that any dividends distributed to individuals working for a limited liability company are to be considered as earned income. But according to Uutiset, Finland’s Supreme Administrative Court has now expanded its interpretation to declare that, even capital income from a limited partnership company that is paid to the limited liability company acting on behalf of a partner, should still be thought of as that individual’s earned income for work performed.

Tero Määttä, lead tax specialist of the Finnish Tax Administration Vero, said: "The ruling reinforces the tax administration’s established taxation practice guidelines so, in practice, it will not result in any changes to implementation of the provision. The decision clearly indicates that the scope of the provision for work-based dividends is extensive."

The ruling was based on the review of a case in which a doctor worked at a limited partnership firm and was paid via a limited liability company. The court found that the business model used by the medical practice’s limited partnership company was artificial and unsubstantial. In fact, it indicated that the only benefit for shareholders would have been the anticipated taxation gains. As a result, it was charged with tax evasion.

The tax administration spokesman said he had no information about the number of similar cases that were being prosecuted in the courts but speculated they were rare.

Back in 2014, the then health and social affairs minister Laura Räty came under scrutiny for adopting arrangements to declare taxable additional income as tax-free dividends. The practice reportedly continued for a period of four years while she worked as a physician.

Between 2007 and 2011, Räty reportedly pocketed roughly €20,000 (US$24,486) in additional income, declared as dividends from a firm known as DocOne, in which a company she owned was a shareholder.

Had Räty declared this income as salary on top of additional earnings from the Helsinki-Uusimaa hospital district HUS, she would have had to hand over more than half of the entire sum in taxes and other statutory contributions. But the practice was not illegal at the time, and Räty later said she would not do the same thing again.

Emma

Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.

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