SAC Ruling: Ownership Structure of Healthcare Company Constitutes Tax Avoidance

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On 21 March 2018, the Supreme Administrative Court (SAC) issued a 3-2 decision, which unfortunately increases the uncertainty surrounding the application of the general tax avoidance norm and weakens the overall predictability of taxation.

The SAC highlighted the relative weakness of the arrangement’s business grounds and applied the general tax avoidance norm to extend the scope of the special provision concerning work contribution dividends.

SAC decision KHO:2018:40 concerned the income taxation of a doctor in an ownership arrangement in which the limited liability company owned by doctor was a general partner in a limited partnership. Each general partner had their own profit centre in the limited partnership, and the turnover of each profit centre was formed based on the work performed by the doctor in question.

According to the SAC, if the profit of the limited partnership was taxed according to its legal form, the limited liability company operating as a general partner would accrue dividends on said profit without the tax consequences applicable to work contribution dividends.

The SAC found this to be a tax benefit in conflict with the purpose of the Income Tax Act and applied the general tax avoidance provision of section 28 of the Tax Procedure Act, despite the fact that the circumstance in question did not fall within the scope of the wording of section 33 b(3) concerning work contribution dividends.

SAC Deemed Structure Aimed at Tax Avoidance

The Finnish Tax Administration had previously issued a decision in which it had added work contribution dividends to the partner’s income. The Administrative Court later confirmed the Tax Administration’s decision on the grounds that the legal form of the arrangement did not, taken as a whole and in accordance with what was deemed to have been its real intention, correspond to the actual nature and purpose of the matter.

The SAC upheld the Tax Administration’s and lower court’s interpretation and stated that, though a tax subject is, as a rule, entitled to choose the most tax advantageous alternative available, taxation must seek to assess the chosen alternative based on its actual financial nature.

The SAC stated that the limited partnership model in question had relatively weak and partially artificial business grounds, and the benefit achieved through the model primarily related to the taxation of the distribution of profits to the partner.

Minority Opinion

It is also worth looking at the well-reasoned opinion of the SAC justices who were in the minority of the vote.

The dissenting justices and the referendary would have sided with the appeal. They stated that the Income Tax Act’s provision on work contribution dividends, which was enacted after the tax avoidance provision, must be considered a special tax avoidance provision with the clearly delineated scope of application expressed in the provision itself. As a result, they were of the opinion that the scope of this special provision could not be extended by the general tax avoidance provision to also cover the distribution of profit in a limited partnership.