The reform proposed by the Finnish Government serves two main purposes: aligning Finnish law with EU law and removing tax barriers that have so far prevented European Long-Term Investment Funds (ELTIFs), an EU fund category aimed at channeling capital into long-term projects, from being set up in Finland. The proposal is relevant for asset managers and fund promoters evaluating Finnish or EU fund structures, and for institutional and retail investors in closed-ended ELTIFs (draft bill to amend section 20a of the Income Tax Act (1535/1992, ITA) and related legislation, with the public consultation period having closed on 16 September 2026).
Why the rules are changing
Under Finnish law, investment funds and special investment funds are exempt from income tax at the fund level, with taxation instead applied at the level of the unitholder, so that investing through a fund is not treated less favorably than direct investment. The conditions for this exemption are set out in section 20a of the ITA. In Case C-342/20 of 7 April 2022 (A SCPI v. the Finnish Tax Recipients' Legal Services Unit), the Court of Justice of the European Union held that requiring a foreign fund to be contract based, rather than company or trust based, as a condition for tax exemption breaches the EU rules on the free movement of capital. The latest Government Programme in Finland committed to aligning the fund tax rules with EU law, and the 2025 mid-term policy review further committed to facilitating EU-enabled fund structures such as ELTIFs.
Removal of the contractual-form requirement for foreign funds
The requirement that a foreign fund be contract based to qualify for tax exemption would be removed. In its place, a foreign fund would need to be tax exempt, effectively tax exempt, or fiscally transparent in its state of registration. All other existing conditions, being openness and a minimum of 30 unitholders, or alternatively profit distribution and professional investor requirements, would remain unchanged. This is a substitution of one condition for another, not a general widening of the exemption to all foreign corporate form funds.
Clarification of the profit-distribution requirement
The distribution requirement would be met not only where a fund actually distributes in cash at least three quarters of its realised annual profit, but also where at least three quarters of that profit is otherwise taken into account as the unitholder's income under the unitholder's own taxation, even without an actual cash distribution. The wording of the law would also be updated so that unrealised increases in value are replaced with unrealised changes in value (as being out of scope of the requirement, so that unrealised decreases are captured too, aligning the wording with the corresponding provision in the Act on the Managers of Alternative Investment Funds. Despite the envisaged clarifications, we expect that this requirement of the tax exemption will be challenged by taxpayers based on the free movement of capital (e.g. via a court case).
Facilitating access to European Long-Term Investment Funds
For closed-ended special investment funds structured as ELTIFs, the requirement that all unitholders be professional investors would be removed. A new, ELTIF-specific set of conditions would instead apply, requiring adequate profit distribution and minimum capital of EUR 2 million. This reflects the 2023 reform of the EU ELTIF Regulation, which removed the minimum investment requirement for retail investors in closed-ended ELTIFs, and is intended to remove tax obstacles to establishing ELTIFs in Finland, where no ELTIF exists to date.
Consequential changes to withholding tax and other provisions
The Act on the Taxation of Non-Residents' Income would be amended so that the withholding tax exemption based on the EU Parent-Subsidiary Directive would not apply to profit distributions made by tax exempt investment funds or special investment funds. The withholding tax exemption for dividends paid to foreign funds would also have its contractual-form requirement removed, consistent with the changes to section 20a. Minor technical clarifications are also proposed to section 10 of the Income Tax Act, section 3(2) of the Withholding Tax Act, and section 9 of the Prepayment Act.
Expected impact and key considerations
According to the draft government bill, the primary purpose of the changes envisaged is to align the statutory wording with EU law requirements already largely reflected in current case law and tax practice, and to remove barriers to establishing ELTIF fund structures in Finland. However, as with the original introduction of section 20a, which was also not expected to change the tax treatment, yet has since caused many interpretative disputes, the practical effect of these amendments may extend beyond what the bill anticipates. The changes are not expected to have significant impact on tax revenue. The proposed amendments are intended to enter into force as soon as possible, with the changes to the ITA applying for the first time in the taxation for 2027, and the amendments to the Withholding Tax Act and the Prepayment Act applying to income paid on or after 1 January 2027.
