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Sari Laaksonen |
The proposal for the amendment of the act on the taxation of income of a person subject to limited tax liability was issued on September 15 2008. The legislative proposal for the reform would mean the regulations on the tax at source withheld on the dividend distributed by a Finnish company would correspond to Community law and ECJ practice. The amendment is due to enter into force on January 1 2009, and the new regulations will be applied to dividends paid on January 1 2009 or thereafter.
Proposed amendments
Under the proposal, dividends paid by a Finnish entity to a company subject to limited tax liability in Finland would not be subject to Finnish tax at source if the dividend paid between equivalent Finnish legal entities is tax exempt. The dividend recipient would also have to have its domicile in a state within the EEA, under the Council Directive (77/799/EEC) concerning mutual assistance by the competent authorities of the member states in the field of direct taxation and taxation of insurance premiums or other equivalent agreement. The company receiving the dividend must also provide a clarification that the residence state of the dividend recipient does not exempt or does not allow full credit against the residence-state taxes for the Finnish tax at source paid on the same dividends.
Consistent with the Parent-Subsidiary Directive (90/435/EEC), if the foreign dividend recipient has a holding of at least 15% in the capital of the Finnish dividend distributing company, the dividend is tax exempt in Finland. In accordance with the Parent-Subsidiary Directive, the proposal includes an amendment according to which the holding requirement will be lowered to 10%.
It is also proposed that Finland withhold a 19.5% tax at source on Finnish-source dividends in the event the shares in the Finnish company belong to the investment assets of the recipient company and the recipient company is not a legal entity defined in the Parent-Subsidiary Directive, which holds at least 10% of the share capital in the Finnish company. It should be noted that only banks and insurance companies may have investment assets as referred to above. The same tax rate and withholding liability will be applied if the dividend is distributed by a Finnish public company and the recipient company defined in the Parent-Subsidiary Directive is not a publicly listed company or does not hold at least 10% of the share capital in the distributing company.
In general, non-resident individuals are subject to tax on Finnish-source income. The dividend is subject to tax at source at the rate of 28%. In tax treaty situations, the rate may be lower, or the dividend may be tax exempt. According to the amendment, under certain conditions, the taxable amount of dividend distributed to non-resident individuals may be defined as the taxable amount of resident individuals is defined under the Finnish Act on Assessment Procedure (1558/1995). Non-resident individuals may decide whether the dividend is subject to tax at source at the rate of 28% or a lower rate provided by the tax treaty, or whether the act on assessment procedure would be applied to the dividend. According to the act on assessment procedure, a dividend paid to a Finnish resident individual shareholder may be split to be taxed partly as capital dividend and partly as earned income. The amount of dividend taxable as capital dividend is first determined to correspond 9% of the mathematical value of the shares owned by the shareholder. The capital dividend is considered tax exempt up to €90,000 ($120,000) per year.
Under certain conditions, the proposed amendments would either exempt or reduce the amount of tax at source concerning the dividend paid by a Finnish company to its non-resident shareholder. It should be noted, however, that the proposal does include provisions concerning foreign investment funds receiving dividends from a Finnish company.
The Finnish Supreme Administrative Court has filed a request for a preliminary ruling from the ECJ concerning the withholding tax on dividends distributed by a Finnish company to a Luxembourg SICAV fund. One question is whether it is against EC Treaty provisions that a Luxembourg SICAV fund is not exempt from tax at source withheld from Finnish source dividend or whether a Finnish limited liability company or an investment fund should be considered to be comparable to the Luxembourg SICAV even though no company form corresponding to the Luxembourg SICAV exists in Finland, and this company form is not mentioned in the appendix referred to in the Parent-Subsidiary Directive.
(The reform of legislation was still pending when this article was written)
Sari Laaksonen, (sari.laaksonen@castren.fi)
