Ruling of the Supreme Administrative Court on the taxes withheld at source on dividends paid to a foreign life insurance company

On 23 May 2016, the Supreme Administrative Court handed down a ruling on a case involving a life insurance company from Luxembourg that among other products also deals in investment-linked insurance products. The company had received Finnish dividends subject to tax at source (KHO:2016:77).  

The ruling discusses the tax treatment of such dividends, and the Court points out that attention must be paid to the provisions of Article 63, Treaty of the Functioning of the European Union, which prevent all restrictions on the movement of capital between Member States; as well as to the provisions of Article 40, Agreement on the European Economic Area signed on 2 May 1992.    

In accordance with the Ruling of the Supreme Administrative Court:  

• There should have been no withholding of tax at source for 2014 when the life insurance company received dividends for its holdings of shares and these dividends were added to the company's technical provisions. Because the expenses collected from insurance clients must not be added to the technical provisions, their amount must be accounted for and deducted accordingly. The company must give a report on the effects of the received dividends on its technical provisions.
• When dividends are paid on Finnish shares (that are part of the 'investment' linked to the insurance), a deduction is permitted from the 2015 taxes at source, in reference to § 8, subsection 1.10, Business Tax Act, corresponding to the share of dividends received from Finland of the insurance company's turnover. Because the management fees collected from insurance clients cause the value of the insurance policy to diminish, and they also decrease the technical provisions, the amount of such expenses must be deducted.

The Court's ruling only applies to the taxes at source paid by life insurance companies with receipts of dividends on the shares they own due to investment-linked insurance. The Finnish Tax Administration only applies the ruling's interpretation to life insurance policies that are linked with such investments.

• Link to the text of the ruling: KHO:2016:77 (kho.fi, in Finnish)

The ruling refers to the provisions of Section 3, sub-section 7 of the Act on the Taxation of Nonresidents' Income and to the procedure that applies to foreign pension institutions. If a foreign insurance company believes that it is entitled to a refund of withheld tax-at-source, the guidance on the treatment of foreign pension institutions can be used as a guideline for the time being.

• See the guidance Taxation of dividends received by foreign entities offering statutory pension insurance.

Under the calculation rules published by the Financial Supervision Authority, the turnover of a life insurance company consists of insurance premiums before the part paid out to reinsurers, plus the net revenue from its investments as recorded on the profit-and-loss account, plus any other revenues.

• Guidance published by the Financial Supervision Authority (pdf, in Finnish)

The Tax Administration requires the insurance companies that submit a refund application to present, as appropriate, the same facts and information that pension institutions would normally present when submitting a similar request. In addition, the insurance company must enclose an account explaining how much is deducted from its receipts of dividends, and what the reasons for these deductions are. The form to complete is the "Application for refund of Finnish withholding tax. The applicants must prepare a calculation of the amount to be deducted and give reasons for the deductions.