Legal Alerts/12 Jun 2024

New Supreme Court Ruling on the Assessment of Intentionality in Tax Fraud Cases

A recent Supreme Court judgement (KKO 2024:34) provides some long-needed clarification on the assessment of intentionality in cases where individuals have failed to report their income.

Background

The case involved an individual (Person A), who lived in Germany at the time and had inherited an investment account in a Swiss bank. The bank continued to actively trade investment instruments within the account, just as they had previously done based on the mandate of the previous owner of the account.

Person A later moved to Finland and became generally liable for tax here. In her annual tax returns in 2010–2013, Person A failed to declare the capital income based on the foreign investment account. As a result, she evaded taxes totalling EUR 77,283.96, which is more than four times the lower limit for aggravated tax fraud in Finland.

Under the Finnish Criminal Code, a person can be convicted of tax fraud if they have neglected to carry out their duties pertaining to taxation for the purposes of avoiding tax. In the case at hand, Person A denied that her conduct was intentional based on the argument that she was not aware of the specific nature of the investment account, its yields, or the related tax liability in Finland.

Judgement of the Supreme Court

Approximately a year ago, the Supreme Court had already convicted another person for tax fraud in a similar case (KKO 2023:15). In that case, after becoming aware of the situation, the person had immediately started to investigate the issue, made a claim for adjustment of tax, and paid all the missing tax.

However, as the individual was aware of the profits of the foreign accounts and should have understood the duty to report their income, the Supreme Court concluded that there was no other credible explanation for their neglect to carry out their taxation-related duties than the purpose of avoiding paying tax in Finland. The person was thereby convicted of tax fraud.

In the case at hand, Person A reportedly became aware of their tax obligation only in 2014 after the Swiss bank’s contact person pointed out the taxation of the income in Finland. Similarly, as in the earlier case, Person A immediately began to investigate the matter and corrected the non-assessment of the taxes.

This time, the Supreme Court found that Person A had a credible explanation for failing to report the taxes despite being aware of the account and even having visited the bank multiple times. Person A had lived abroad for multiple decades practicing music and art. She had never received a salary or managed her own financial matters. Consequently, Person A was under the mistaken impression that the bank, which paid the withholding tax in Switzerland, would take care of all tax-related matters on her behalf.

Having assessed the situation as a whole, the Supreme Court deemed Person A’s explanation credible enough so that a reasonable doubt remained regarding her intentionality in avoiding taxes. The charges against her were therefore dismissed after a 3–2 vote.

Impacts of the judgement

The new Supreme Court judgement guides the lower courts to broaden their consideration of different conditions and individual characteristics in cases where individuals have neglected to report their foreign income. The judgement establishes that when the intentionality of such behaviour is ambiguous, it is worth the effort to defend against tax fraud charges. Taxpayers cannot be presumed to be engaging in certain conduct specifically for the purposes of evading taxes – this must be proven by the prosecutor beyond a reasonable doubt.

If you have any questions about the ruling, please contact the undersigned or your regular Borenius contact.

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Additional information

Markus Kokko

Partner

Helsinki

Tero Kovanen

Partner

Helsinki