Taxation of dividends in kindNews, 7/16/2019
It has come to The Finnish Tax Administration's attention that several publicly listed companies are going to pay dividends in kind this year. Regardless of whether the dividends are paid in cash or, for example, as shares in an another company, the income is treated as taxable dividend income for the beneficiary in accordance with the Finnish Income Tax Act sec. 33 a.
Payment of in-kind dividends might be related to open questions regarding tax payment, transfer tax or valuation, which are not dealt with in the current guidance by the Tax Administration. The Finnish Tax Administration will update its guidance on these questions.
If dividends are paid as shares of a limited liability company, the amount of dividend is the market value of the shares on the day when the dividend was first available for payment (dividend payment date or the date of the dividend distribution decision, if the decision does not include any separate payment date). The market value of the share of a publicly listed company is the weighted average quote of the day in question.
The payer must send an annual information return on the dividends to the Finnish Tax Administration in order to ensure that information is transferred to the pre-completed tax returns of individual taxpayers. If dividends in kind don't include cash dividends at all, and no tax has been withheld, the tax on the dividend payment has to be paid as back tax. If cash dividend is also paid, for example, cash payment for fractions of shares, the payer will withhold tax at maximum of the amount of cash dividend. A Finnish tax resident can avoid back taxes by requesting income tax prepayments or supplementary prepayment. More information about how to request tax prepayments and supplementary prepayments can be found here Prepayments individuals and Prepayments companies and organisations.
In the case of nonresident shareholders, missing tax-at-source will be imposed to a nonresident beneficiary by a separate decision. If the Finnish Tax Administration has not separately imposed the tax at source to be paid, the nonresident should apply for tax at source to be imposed at the latest when the corrections to the pre-completed tax return of the payment year have to be made after the year of payment has ended. When the beneficiary requests tax treaty provisions to be applied, the beneficiary has to present the information required to apply the tax treaty. More information about applying tax treaty provisions can be found here Payments of dividends, interest and royalties to nonresidents. The Finnish Tax Administration can also impose tax at source to be paid earlier if the Finnish Tax Administration has received the third-party information required to impose the tax.
When transferring stock dividend later, the acquisition cost is the market value as a whole, although a part of the dividend income may be tax-exempt. The period of share ownership is calculated from the date when the dividend was first available for payment. More information about transferring stock dividend is found in Finnish Arvopaperien luovutusten verotus and in Swedish Beskattning av överlåtelse av värdepapper in chapter 14.
If stock dividend is paid out in the form of shares possessed by the company, a resident beneficiary must pay transfer tax and submit a transfer tax form. If the beneficiary is nonresident, the payer has to collect and pay the transfer tax on the beneficiary’s behalf. If the company pays the transfer tax and submits the transfer tax form on beneficiary’s behalf, the beneficiary does not have to submit any separate transfer tax form. Transfer tax does not have to be paid if the payable transfer tax is less than 10 euros per beneficiary. The filing process will change in the end of the year 2019. The Finnish Tax Administration is going to update its guidance also in this respect.
The transfer tax that the company pays on behalf of its shareholders is considered an item similar to distribution of profit (the Supreme Administrative Court, case number 2015:84). Therefore, the Finnish Tax Administration considers that the transfer tax (that the company has paid on the beneficiary’s behalf) must be regarded as taxable capital income for the resident beneficiary in accordance with the Finnish Income Tax Act sec. 32. The item that has been taxed as capital income is included in the acquisition cost of the shares, when the stock dividend will be transferred later on.
In the case of non-resident beneficiares, the transferor must collect and pay the transfer tax to the Finnish Tax Administration on behalf of the non-resident beneficiary in accordance with the Transfer Tax Act sec. 16. This does not result in any taxable income for the non-resident beneficiary nor acquisition cost to be taken into account in the taxation of capital gain.
If the decision to pay the transfer tax is made as a part of the dividend distribution decision (the payment is a part of the dividend agreed for distribution), the transfer tax paid on behalf of the resident and nonresident beneficiary is taxable dividend income for the beneficiary.