Finland's President ratified amendments to the Income Tax Act establishing a permanent framework for foreign investment funds' tax residency, effective 1 January 2027, which exempts foreign UCITS and AIFs managed independently in Finland from being treated as Finnish tax residents based solely on their Finnish management company's activities.
The President of Finland ratified a law that brings amendments to the Income Tax Act concerning the tax residency rules for certain foreign investment funds on 16 June 2026.
Under Finland’s general rules, a foreign entity can be treated as a Finnish tax resident if its place of effective management is located in Finland. However, a temporary exemption—applicable for tax years 2021 to 2026—has applied to specific foreign undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIF).
To qualify for this exemption, the management company must operate independently, handle at least three distinct funds, and receive market-based compensation for its professional services. Additionally, the law provides strict definitions for fund independence, requiring that ownership and income distribution remain largely separate from the managing entity.
This law, which comes into effect on 1 January 2027, provides a permanent framework following the temporary exception that applied through the 2026 tax year.
Under the new legislation, a foreign fund will not be considered to have a place of effective management in Finland solely based on the activities of its Finnish management company, provided the following conditions are met:
Conditions for the fund management company
- The three-fund standard: A fund management company must qualify as an independent operator by administering at least three separate, independent funds or sub-funds. This threshold is fundamental to establishing the company’s professional standing in the sector.
- Permitted activities and compensation: The company’s work on behalf of any fund must remain within its ordinary business scope, either as prescribed by law or under a contractual arrangement with the fund. Equally important, the management company must receive compensation that reflects market rates—essentially, an arm’s length price for the services rendered.
- Implications for tax residence: When a fund management company satisfies these conditions—managing multiple independent funds, operating within defined activity parameters, and receiving fair-market compensation—it does not automatically establish a place of effective management in Finland. However, if the company fails to meet even one of these criteria, it cannot claim automatic exemption from having its effective place of management considered to arise in the country.
Defining an “Independent Fund”
A foreign fund qualifies as “independent” from its management company if it meets two criteria. First, the total fees and compensation the management company receives from the fund cannot exceed 50% of the company’s total revenue during the relevant tax year. Second, at least 50% of the fund’s units must be held by investors unrelated to the management company.
Flexibility and transition rules
The law provides a ramp-up period allowing newly managed funds to be deemed independent starting from the year the management company begins managing them in Finland, provided the independence criteria are satisfied within three tax years. Additionally, if the 50% revenue threshold is not met in a subsequent year due to changes in the manager’s other funds rather than changes to the fund itself, the fund retains its independent status.
Scope of the law
The amendment applies to collective investment undertakings established or registered outside Finland that are equivalent to UCITS, as well as Alternative Investment Funds (AIFs) established in an EEA state with managers operating in Finland. Sub-funds are treated as individual funds under these rules.
