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Granting tax benefits at source for dividend income paid on nominee-registered shares

News, 3/13/2020

The Finnish Tax Administration has received enquiries on how to withhold tax at source on dividends to be paid out for the 2020 taxable year. It is possible to grant tax treaty benefits already at source. This corresponds to previous practice.

In accordance with § 10 of the act on the taxation of nonresidents' income (Laki rajoitetusti verovelvollisen tulon verottamisesta 627/1978), the provisions of an international convention, as referred to in § 1 of the act on the taxation of nonresidents' income, are to be followed when tax is withheld at source. The application of such provisions requires that the beneficiary has presented documentation to the payor of the income in advance, indicating the beneficiary’s country of residence and other details that are necessary for the relevant international convention to be applied. To present the required documentation on their country of residence, the beneficiary can report their name, date of birth and other official personal identifier as well as their address in the country of residence, or alternatively, submit a tax-at-source card to the payor.

In the case of paying out dividend income, the payor must ascertain that the beneficiary is the beneficial owner of the dividends within the meaning of the tax treaty. To be able to ascertain this, the payor may ask the beneficiary to provide a statement where they affirm that they are the beneficial owner and thereby entitled to the lower rate of tax at source, accorded by the tax treaty between Finland and their country of residence.

On the condition that the payor, at the time when dividends are paid out, has all the details necessary for applying the tax treaty, and on the condition that those details are not in contradiction with other information that the custodian paying out the dividends has received about the beneficiary, treaty benefits can be provided to the dividend beneficiary already at source. Therefore, in accordance with the practice that has been applied so far, treaty benefits can be given already at the stage when the amount is paid.

An application for a tax-at-source card or for an advance ruling can be submitted to the Tax Administration in order to ascertain the correct tax to be withheld at source

If it is unclear whether tax should be withheld at source or at what rate tax at source should be withheld, then either the payor or the beneficiary of the income can submit an application for an advance ruling referred to in § 12 a of the act on the taxation of nonresidents' income.

When in the process of withholding the payor is applying the instructions received in the form of an advance ruling or tax-at-source card, the payor must ascertain that the circumstances that had been described in the application for the advance ruling or tax-at-source card continue to prevail when the payor pays the dividends. In addition, for example if the provisions of a tax treaty are applied, the payor must, even if a tax-at-source card has been issued, ascertain that the beneficiary is the beneficial owner of the dividends within the meaning of the tax treaty.

If the tax-at-source card or advance ruling has been issued on the basis that the beneficiary can be found comparable to a Finnish entity for whom similar dividends would be tax exempt, for example to an investment fund or other comparable entity, the payor can act as instructed by the advance ruling or tax-at-source card at the time when the payor pays the dividends. This requires that the payor has verified that the tax-at-source card has been issued to the beneficiary to whom the dividends are being paid, i.e. it must be checked that the identity information on the tax-at-source card match the identifying details on the beneficiary that the payor has available. If the tax-at-source card instructs the payor to refrain from withholding any tax at source, the payor can only do so when paying out the types of payments that the tax-at-source card refers to. For example, if the tax-at-source card refers to dividends from Finnish stock-exchange-listed companies, the payor cannot apply the instruction on that card to payments of interest income to a beneficiary.

In 2020, the provisions of § 10 b of the act on the taxation of nonresidents' income are still in force, and they can be applied on the payments of dividends this year. To apply the provision requires that the withholding rate is at least 15 percent, that the account operator has made an agreement with the intermediary registered in the Foreign Custodian Register, and that the other requirements are fulfilled as provided in the act.

The tax at source must be withheld in accordance with § 7 of the act on the taxation of nonresidents' income if the payor cannot, at the time when the dividends are paid, ascertain that the beneficiary is entitled to a lower rate as described in the above guidance. However, an adjustment to the withheld amount can be made during the year of payment (as a “quick refund”), if the beneficiary shows the custodian sufficient proof that the rate can be reduced. The proof that the rate can be reduced may consist of a tax-at-source card that has been applied for after the dividends were paid. In this case, the application for such a card must indicate that the beneficiary needs a revised tax-at-source card for an amount of income that has already been received, and the application must also indicate all the details and information that are necessary for the tax authorities to make a decision on the matter.

Alternatively, the beneficiary can ask the Tax Administration to refund the tax at source after the end of the year when the dividends were paid. In this case, the refund application must contain an enclosure containing the necessary details for evaluating the applicability of a tax treaty or other reasoning for the refund. The forms to be submitted in order to request refund are 6163e (for corporate entities) and 6164e (natural persons).

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More information on the taxation of dividends: