The Finnish Tax Administration will tackle arrangements to avoid withholding tax on dividends

News, 12/17/2019

Nominee-registered shares are subject to withholding tax arrangements also in Finland. The extent of the phenomenon is under investigation in the Tax Administrations control project. The project plans to implement comprehensive control measures to eliminate the phenomenon.

The control project has so far identified a number of arrangements involving tax risks that add up to hundreds of millions of euros in dividend flow and tens of millions of euros in tax interest. As the analysis progresses, the overall picture of the total potential tax gap will become more accurate.

– Currently, the project is analyzing the received reference data material, as well as taking part in international cooperation with the tax administrations of other countries, which already have observations on the phenomenon, says Director Marko Myllyniemi from the Corporate Taxation Unit.

The data analysis and international cooperation have already shown results:

– Based on the reference data and the data obtained from international cooperation, we can see that this phenomenon exists in Finland, says Project Manager Paula Palukka from the Corporate Taxation Unit.

– Analysis of the phenomenon will continue and the project will proceed to various control measures, such as possible tax audits. The measures will involve international cooperation at the level of exchange of information and possibly operational surveillance, says Myllyniemi.

One of the purposes of the control project is to get an overview of the phenomenon of seeking tax advantage through arrangements and transactions around the dividend record date.

How is withholding tax on dividends being avoided?

Arrangements for avoiding tax withheld at source as well as cum/ex and cum/cum transactions are a broad international phenomenon, which have caused major tax losses in many European countries. The phenomenon refers to arrangements and transactions taking place around the dividend payment that aim at gaining tax advantage.

The purpose is to select an owner, who is on the basis of a tax treaty exempt from withholding tax at the time of dividend distribution. Such a tax treaty is in force, for example, between Finland and the United Kingdom.

In such arrangements, the recipient of the dividend is not actually entitled to use the dividend. Instead, the recipient of the dividend is required to pay the amount of the dividend forward to the beneficial owner. After the distribution of dividends, the shares typically return to their original owner and the tax benefit is shared between those participating in the arrangement.

– The arrangement is made without the real and permanent purpose of owning the shares. Derivatives are also often used and there are many different ways to plan such arrangements, says Palukka.

The movements of the shares around the dividend record date are illustrated below.

Kuva 1 EN Osinkojen Läve

Picture 1: Typical pattern of an arrangement to avoid withholding tax on dividends.

Picture 2: View of A Ltd's book-entry account holding X Oyj (Finnish Plc) shares. The numbers on the horizontal axis of the figure represent the distance from the record date (= 0) of X Oyj's dividend. The vertical axis represents the number of book entry shares. The number of book-entry shares increases temporarily around the record date. A Ltd. received the dividend without withholding tax.

Picture 3: View of the B GmbH book-entry account holding X Oyj (Finnish Plc) shares. The numbers on the horizontal axis of the figure represent the distance from the record date (= 0) of X Oyj's dividend. The vertical axis represents the number of book entry shares. The number of book-entry shares will temporarily decrease around the record date.

Read also:
Tax evasion in investment activities is changing – the Finnish Tax Administration steps up control (Tax Administration Bulletin, 9/18/2019)