Dividend distribution indirectly based on work deemed as tax avoidance based on Supreme Administrative Court ruling

The Finnish Supreme Administrative Court issued a new yearbook ruling (KHO 2018:40), forming part of the vast case law on the interpretation of the Finnish general anti-avoidance rule found in section 28 of the Act on Taxation Procedures.

In the case at hand, the healthcare and social service company B Ky was formed as a Finnish limited partnership. The general partners of B Ky were private holding companies of the doctors who actually produced the services sold by B Ky to the end customers. The taxable allocation and distribution of the profit of B Ky between the doctors' private holding companies was based on the net profit generated by the individual doctor in question.

From the doctors' perspective, the achieved tax treatment was more beneficial than if the company had been a limited liability company, because the special rule on dividends distributed based on work was not directly applicable. No dividend was paid based on work performed, only the share of income from the limited partnership was allocated based on the work performed by the doctor (and the income could further be distributed from the holding company to the doctor purely based on his or her ownership).

The Supreme Administrative Court nevertheless ruled that since the business reasons for using this particular legal form (a limited partnership and the individual holding companies) were rather thin and artificial, the legal form could be set aside and the tax consequences could instead be based on the true circumstances, i.e. the doctor receiving work-based dividends.

The ruling is yet another example of the increasingly broad application of the anti-avoidance rule in Finnish taxation. Ownership structures and remuneration schemes should be planned with due care and taking into account the possibility of Tax Administration challenging any exceptionally beneficial schemes.