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Principles for participating in funds

Finnfund uses a range of tools to finance enterprises operating in developing countries. Some of its finance is channelled via funds, including PEFs (Private Equity Funds).

In many of the poorest developing countries, it is hard for small and medium-sized enterprises that need finance for operations or expansion to find risk-tolerant finance, typically in an equity-rated form. Funds can put together risk financing and offer other forms of support, such as sectoral know-how or experience in environmental questions, for projects and companies that would otherwise have no access to financial services. This is why fund investments are suitable for the poorest and most fragile countries, where companies face challenges in obtaining finance at a reasonable price.

The funds financed by Finnfund generally specialise in a specified region, for example, or a defined sector such as renewable energy or sustainable forestry. Most of the funds concentrate on local micro, small and medium-sized enterprises. The focus is on funds that finance investments required for expanding operations.

Before making the decision to invest in a fund, Finnfund closely examines its investment policies and, where necessary, brings influence to bear. It is also important to ensure that the fund has a competent manager with principles that meet Finnfund’s requirements. If these conditions are met and an investment decision is made, Finnfund often participates in the management of the fund, thus ensuring that resources are applied sustainably and in a way appropriate for development policy. Funds are requested to provide comprehensive information about what they invest in, and to report on matters such as the taxes that they pay.

Funds and taxation

Companies financed by Finnfund via funds pay taxes in the country where they operate and report on them annually. One of the most important development aims and achievements of Finnfund’s work is the tax revenue and other official fees paid by companies financed to their host countries.

Many funds that invest in developing countries are registered in international financial centres, which serve as investment conduits between source and target countries. Financial centres generally provide clear and predictable legislation and taxation, and offer a situation in which fund investors from many different countries are treated equally. Investors pay taxes in their home countries. Consequently, it is important to have a functional exchange of information between officials of different countries.

The group of European Development Finance Institutions (EDFI) has common guidelines for transactions involving EDFIs and entities domiciled in offshore financial centres.

Finnfund’s tax policy consists of principles and practices to assess and promote tax responsibility in more detail.