Taxation relating to Trusts in Finland

What is a trust? 

A trust is a legal arrangement aimed at managing a pool of assets for the benefit of another person, where a settlor transfers assets to a trustee for administration on behalf of a beneficiary. Trusts can be irrevocable or revocable, and in taxation they can be categorized as either flow-through entities (i.e. transparent) or separate taxable entities (i.e. opaque). 

Trusts are common in common-law jurisdictions, but Finnish law does not recognize trusts, nor is there specific legislation related to trusts in Finland. However, taxation issues related to trusts arise in cases where, for example, a person moving to Finland from abroad is already a beneficiary of a trust or is about to become one while being tax liable in Finland. 

The taxation of trusts in Finland is based on general tax principles, established tax practices, and relevant case law. Consequently, taxation issues involving trusts must always be resolved on a case-by-case basis, considering the factual circumstances of each situation. 

Establishing a trust involves various tax considerations, especially if the assets transferred to the trust are located in Finland, or if the settlor or beneficiaries are subject to Finnish tax liability. Establishing a trust or distributing funds from a trust may give rise to complex and ambiguous issues related to income taxation, as well as inheritance and gift taxation. 

Taxation of beneficiaries 

In Finland, the taxation of trust beneficiaries depends on various factors, including the legal form of the trust, the roles of the parties involved in the trust arrangement, who holds the actual decision-making power over the assets transferred to the trust and distribution of those assets, as well as when and in what form the funds have been transferred to the trust or distributed to the beneficiary. For example, whether the trust's administrator is a separate legal subject from the beneficiary is relevant from a taxation perspective. In tax matters involving trusts, particular attention is given to whether the trust is considered a flow-through entity or a separate tax subject. 

1. If the trust is a flow-through entity (i.e. transparent), it is not treated as a separate tax subject. In this case, the trust income is allocated to the beneficiary and taxed at the level of the beneficiary already when the income is accrued, even if the income (or profit) has not yet been factually distributed to the beneficiary. As a result, this can lead to a situation where the beneficiary will pay income tax on income which it has not received yet.  

2. If the trust is a separate taxable entity (i.e. opaque), the beneficiary has no immediate right to the trust’s assets or income until they are actually distributed. In such cases, taxation at the level of the beneficiary is deferred and occurs once the funds are distributed from the trust to the beneficiary or income is paid from trust to the beneficiary. This structure may allow income to accumulate in the trust without immediate tax consequences for the beneficiary, which can be advantageous during the period of asset growth. 

Key questions for beneficiaries, from a taxation perspective, include when and in what form they derive financial benefit from the trust. Answering these questions requires examining both the trust's founding documents and the beneficiary's actual rights and actions. 

Supreme Administrative Court case law 

In each individual case, tax questions related to trusts can be interpreted based on the rulings of the Finland's Supreme Administrative Court (SAC): 

• SAC 2013:51: This case involved the taxation of income received from an irrevocable trust. The case concerned the point in time at which the gift tax liability of the beneficiary of the trust began. The trustee distributed funds to the beneficiaries according to the trust’s rules, based on the trustee's discretion following an application by the beneficiaries. The SAC ruled that beneficiary A could not exercise the rights of an owner or gain control over the trust's assets at the moment they became a beneficiary. A was deemed to have reached the status of an owner, and gift tax liability began only once the assets were actually transferred from the trust to A. 

• SAC 2017:149: In this case also the case concerned the point in time at which the gift tax liability of the beneficiary of the trust began. The SAC confirmed that the beneficiary was only considered to have received a taxable gift once funds were actually distributed from the trust. However, the SAC extended its previous rulings by stating that tax liability might begin even before the distribution of funds if the beneficiary gains actual control over the trust itself. In practice, this referred to the moment when the beneficiary alone could decide when to distribute funds from the trust. 

• SAC 2024:100: In its most recent ruling concerning trusts, the SAC ruled that when A transferred shares in company B to a Guernsey-based trust, which was intended to be perpetual and irrevocable, the beneficiaries were not considered to have received a taxable gift. Instead, the share transfer was treated as a taxable capital gain event for A under Finland's Income Tax Act. This outcome was based on several factors: i) the transfer was not executed as a gift, ii) the trust was considered a separate taxable entity under the Income Tax Act, and iii) the share transfer was not entirely gratuitous. As a result, the share transfer fell under the scope of the Income Tax Act and was regarded as a transaction between A and the trust, rather than between A and the beneficiary of the trust. Regarding consideration: as the assets transferred to the trust came under the ownership of the trustee according to Guernsey law, and the primary purpose of establishing the trust was the long-term management of family wealth, the share transfer was not considered as entirely gratuitous. The shares in B company were deemed to be transferred at fair value. 

Direct case law on trusts is limited in Finland, but interpretative guidance on the taxation of trusts and income thereof can also be found in other tax-related precedents. 

Summary