Four prerequisites help identify tax avoidance

How do you know whether a transaction constitutes tax avoidance or not? In her doctoral dissertation, which focuses on Finnish tax legislation and its interpretation, Siru Kaunisto from the University of Vaasa has studied the identification of tax avoidance and examined the prerequisites of tax avoidance. She has also discussed the effects of EU law on identifying tax avoidance.

According to Kaunisto’s dissertation, there are four prerequisites that determine tax avoidance.

– First of all, the transaction in question must constitute a concrete, or monetary, tax advantage. Secondly, this advantage must be unfounded, that is, contrary to the purpose of the law, says Kaunisto, who will defend her dissertation at the University of Vaasa on Friday, 26 August.

According to Kaunisto, the third prerequisite is that the transaction has been carried out for tax purposes rather than for fiscal reasons. The fourth prerequisite is that there are fiscal reasons for the transaction, but they are not sufficient in relation to the amount of the tax advantage. The authority applying the law assesses whether the reasons beyond taxation are strong enough in relation to the tax advantage created by the transaction.

– All legal transactions that constitute tax advantages certainly cannot be regarded as tax avoidance. If the transaction does not constitute an advantage that is contrary to the purpose of the law, the taxable person will obtain the advantage they are seeking. This does not constitute tax avoidance as laid down in law as the prerequisites of tax avoidance are not met. In this case, the implementation of the anti-avoidance rule does not require the assessment of whether the transaction was carried out for reasons beyond taxation or whether these reasons are sufficient, Kaunisto says.

Identifying tax advantage is challenging

According to Kaunisto, assessing a tax advantage that is contrary to the purpose of the law is the most challenging part of identifying tax avoidance.

– These challenges are reflected in Finnish court rulings and decision justifications concerning the implementation of the anti-avoidance rule. The decisions rarely comment on why a tax advantage is considered to be contrary to the purpose of the law. Regardless of this, the decisions may state that the transactions reviewed constitute tax avoidance. In future, therefore, when implementing Section 28 of the Act on Assessment Procedure, it should be stated more clearly what the tax advantage arising from the transaction is and which factors are contributing to the tax advantage being considered contrary to the purpose of the law, Kaunisto says.

According to Siru Kaunisto, the means and typical cases of tax avoidance always reflect their time, as the manifestations of tax avoidance vary according to current economic phenomena and tax legislation, for example.

– Regardless of this, the prerequisites of tax avoidance can be considered more permanent. This is because these prerequisites are largely determined by anti-avoidance regulation.

EU law also affects the identification of tax avoidance

Kaunisto’s doctoral dissertation states that EU law and its interpretation must be taken into account when applying the Finnish general anti-avoidance rule.

The Anti-Tax Avoidance Directive adopted by the EU in 2016 has been partially implemented in Finland by Section 28 of the Act on Assessment Procedure. According to Kaunisto’s dissertation, the identification of tax avoidance must be assessed in the future taking into account the preconditions laid down in EU law.

– In Finland, the general anti-avoidance rule of the Directive was considered implemented by the existing national anti-avoidance rule, and no changes were introduced to the national regulation. While the solution is justified, it involves certain issues regarding the interpretation of Section 28 of the Act on Assessment Procedure. The main issue is that the scope of the Directive and the national anti-avoidance rule differ from one another, Kaunisto says.

The scope of the Anti-Tax Avoidance Directive is limited to corporation tax while the national anti-avoidance rule is also applicable to the income taxation of natural persons. This being the case, when interpreting Section 28 of the Act on Assessment Procedure, it must be determined what kind of significance can be assigned, for example, to the principles of EU law and the case-law of the European Court of Justice in situations where national regulation is interpreted in matters concerning natural persons.

– Based on my dissertation, it can be argued that the interpretation of EU law can no longer be ignored when interpreting national regulation, even though the scope of the regulation is more extensive than that of the Directive. If the national regulation is interpreted differently for natural persons and corporations, this would compromise legal certainty and predictability. A differing interpretation would also be problematic in that national regulation does not make a distinction between the two cases, says Kaunisto, who will defend her dissertation at the University of Vaasa.


Doctoral dissertation

Kaunisto, Siru (2022). Veron kiertämisen tunnistaminen: Oikeuden väärinkäytön kielto VML 28 §:n tulkinnassa. Acta Wasaensia 488. Doctoral dissertation. University of Vaasa.

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Further information

Siru Kaunisto was born in Järvenpää in 1991. Kaunisto, who currently resides in Vaasa,  obtained her Master’s Degree in Economics and Business Administration at the University of Vaasa in 2015. During her doctoral studies, Kaunisto worked as a doctoral student at the School of Accounting and Finance of the University of Vaasa, where she currently works as a university lecturer. Kaunisto also works as a social media content producer for the Verotus magazine that promotes awareness of the Finnish tax legislation and provision.

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