Browsing by Author "Kaira, Atte"

Tax neutrality and material tax uniformity (or in other words, horizontal equity) are both considered as elements of a good taxation system. The latter suggests that economically equivalent financial instruments should be taxed under similar rules. Tax neutrality, in turn, is concerned with efficiency of the tax system by implying that taxation should not distort the optimal allocation of resources in society. The private law part of this study presents how securitization, or securitization-like techniques have been applied to private equity fund interests, in order to turn the equity-based interest into a debt instrument. An observation is made that in some situations, the essential objective of the securitization transaction is to create an economically equivalent, debt-based counterpart to a normal private equity fund interest. One of the underlying purposes behind this kind of transaction might be to make it possible for small private investors to allocate some of their investment capital in private equity, and at the same time, widen the private equity fund’s sources of funding beyond the conventional institutional and other large-scale investors. Similarly, due to tax issues related to normal private equity fund interests, securitization structures have been used to allow public benefit organizations to invest in private equity. The theoretical part of this study presents the concepts of tax neutrality and tax uniformity, and their meaning within the context of taxation of financial instruments. Furthermore, it deals with the question in what circumstances could the Finnish General Anti-Avoidance Rule (the GAAR) come to be applied to economically equivalent financial instruments that produce different post-tax returns, i.e. differ in their tax treatment. Finally, it puts the aforesaid concepts in the context and substance of this study by specifying the questions that should be asked in the tax law part of the study. On the basis of the observations made in the private law part, the essential research question is whether returns on normal private equity fund interests and their securitized counterparts result in similar tax burden in situations, where the holder of such instruments is a public benefit organization or a natural person (private investor). In the tax law part of this study, the income tax treatment of both normal and securitized private equity fund interests is analyzed. In addition to producing answers to the questions presented in the theoretical part, the tax law part covers some of the current issues regarding income taxation of private equity funds and investors thereof. The method used in this part is mainly dogmatic, since the attention is in the contents and interpretation of existing law. Also some practical viewpoints will be presented with regard to the interplay between taxation of financial instruments and corporate finance. The study ends in conclusions, in which the research question is evaluated against the findings made in the tax law part. The study is able to conclude that the tax treatment of normal private equity fund interests and securitized private equity fund interests is not entirely consistent, and thus implies that the ideal of material tax uniformity does not realize between these two instruments. However, it is noticed that material tax uniformity should not necessarily be understood as an absolute requirement of a good tax system. Pursuing for material tax uniformity in the field of finance and investments may not lead to any overall improvements of the tax system, if the instrument considered as normal is actually non-tax neutral compared to other financial instruments. It is further discussed, whether there is any room for the GAAR to be applied to the securitization structures within the context of this study. Based on the observations made in the private law part, the suggestion is that the GAAR should not applied, because the structures – at least in this context – are usually based on commercial reasons, and should not be viewed as artificial.