Taxation of Capital Gains of Foreign Real Estate Investors – New Supreme Administrative Court Precedent
Finland can nowadays tax non-resident taxpayers on capital gains derived from indirect transfers of real estate assets located in Finland. Previously, Finnish tax legislation did not allow for the taxation of capital gains in situations where a foreign investor owned shares in a Finnish real estate company through a holding company structure and realised an exit by selling the shares in the holding company.
The provision of the Finnish Income Tax Act that came into force in 2023 (Section 10.1(10a) of the Income Tax Act) applies, among other things, to gains from the sale of shares in any company if more than 50 % of its total assets on the date of sale or during any 365-day period preceding that date consist directly or indirectly of real estate located in Finland. The chain of ownership is traced from the seller to the property, i.e. the ownership shares at different levels are multiplied together. Indirect ownership units may be Finnish or foreign.
Exception concerning Listed Companies and Certain Investment Funds
The provision does not apply to profits from the transfer of shares in listed companies. Taxation of income from the indirect transfer of real estate may also be prevented if the transferor is treated as a tax-exempt entity in Finland. For example, domestic and foreign investment funds that meet the requirements of Section 20a of the Income Tax Act are tax-exempt.
The Finnish Supreme Administrative Court (SAC) has issued a precedent SAC 2026:1 on the fund exception, in which the listing of one share series of a Luxembourg fund enabled a foreign investor to obtain tax-exempt capital gains from Finnish real estate investments. In that case, more than half of the assets of the so-called special investment fund consisted of forest properties located in Finland. One share series of the fund was to be listed on the Luxembourg Stock Exchange, after which the fund had both a publicly listed and an unlisted share series.
The SAC held that any gains potentially derived from the transfer of the fund's unlisted shares did not constitute income sourced from Finland within the meaning of the Income Tax Act, provided that any of the fund's share series were publicly traded at the time of the transfer.
Impact of Tax Treaties
The provision of the Income Tax Act that came into force in 2023 applies to situations where Finland does not have a tax treaty with the country of residence of the entity receiving the income, as well as where the tax treaty in force with that country of residence does not restrict Finland's right of taxation. This means that even if Finnish domestic legislation would grant Finland the right to tax a capital gain, the applicable tax treaty may prevent Finland from exercising that right. Currently, approximately half of Finland's tax treaties (primarily the older ones) do not grant Finland the right to tax income from indirect transfers of real estate located in Finland. These older treaties do not contain the modern OECD Model Tax Convention rule of "indirectly more than 50 % of real estate", which would expressly cover also the transfer of shares in multi-tier holding structures.
The Nordic tax treaty grants Finland the right to tax income derived from indirect transfers of real estate located in Finland. The treaty provides that capital gains derived by a resident of a contracting state (e.g. Sweden) from the transfer of shares or other interests in a company whose principal purpose is the ownership of real estate and whose assets [i.e. those of the company being transferred] (before deduction of debts) consist directly or indirectly of more than 75 % of real property located in another contracting state (e.g. Finland) may be taxed in that other state (in this case, Finland). The ownership requirement under the Nordic tax treaty is broader than the 50 % threshold required under Finnish domestic legislation, other tax treaties concluded by Finland, and the OECD Model Tax Convention. In other words, even though Finnish domestic legislation grants taxing rights at a 50% threshold, the Nordic tax treaty limits Finland's taxing rights to situations where the share of real estate located in Finland exceeds 75%.
Summary
The amendment to the Income Tax Act, which came into force in March 2023, allows Finland to tax foreign investors on indirect transfers of real estate when more than 50% of the assets of the company being transferred consist of real estate located in Finland.
However, tax treaties may limit Finland's right of taxation. Approximately half of Finland's tax treaties prevent this taxation entirely, whilst the Nordic tax treaty grants Finland taxing rights only if the share of real estate exceeds 75% of the company's assets, either directly or indirectly. In addition, the provision of the Income Tax Act does not apply to certain foreign funds, nor — based on the SAC's recent decision — to the transfer of a share in a foreign fund if any of the fund's share series were publicly traded at the time of the transfer.
Merilampi's lawyers specialising in real estate transactions and taxation assist in situations where the shares of a foreign company or fund owning real estate located in Finland change hands, or where such a fund or company intends to invest in the Finnish real estate market.
