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Paying dividends — tax assessment of the dividend income

Dividends are the distribution of corporate profits by a limited-liability company to its stockholders; the legal norms of the Companies Act regulate the distribution. Tax law, on the other hand, regulates the tax treatment of the income in the form of dividends, including the way taxes are withheld and reported, and the way the fiscal liability is imposed on the parties concerned. To make sure that income taxes of all recipients will be assessed as they should be, it is necessary for the payor to know:

Facts and circumstances related to dividends, affecting fiscal processing, tax withholding and reporting

First, the answers to the following questions need to be cleared up in order to make sure that the dividends are taxed as they should be, that the appropriate taxes are paid and that the required reports are submitted.

Dividends can be paid in cash or in the form of other assets including corporate stocks (i.e. payment in natura). The tax rules that concern dividends also apply on distributions from the company’s unrestricted equity fund (VOPR in Finnish). In the context of nonlisted companies, distributions of dividends can be connected to the shareholder-beneficiary’s work effort, and sometimes the distributions can be characterized as constructive, i.e. hidden dividends.

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Dividends in the dividend recipient’s hands are subject to varying tax treatment, and this depends on whether the company is listed on the stock exchange or not. Legal norms controlling this matter are found in the Act on income taxation. In addition, other legal norms regulate dividend distributions by foreign corporate entities. The profits of real estate investment trusts (REITs) are an example of the special circumstances relating to distributions of dividends.

Read more in “Taxation of dividend income” — Osinkotulojen verotus (available in Finnish and Swedish).

  • Section 2.1 Dividends distributed by a listed company 
  • Section 2.2 Dividends distributed by a non-listed company 
  • Section 2.3 Dividends distributed by a foreign corporate entity 
  • Section 3.2 Dividends distributed by a Finnish corporate entity 
  • Section 3.3 Dividends distributed by a foreign corporate entity
  • Section 5.5 Dividends distributed by a real estate investment trust, REIT 

The Central Securities Depository of Finland maintains the Book-Entry System where accounts can be opened for registering limited-liability companies’ stocks and other securities. It is required that all listed companies’ stocks are recorded in the system. However, nonlisted-company stocks may be recorded there as well. Because the provisions of the CSDR, Commission Regulation on central depositories of securities are in force, the company that issued the stocks, shares or other securities can choose a securities depository freely. However, at present, there is only one central depository of securities (CSD) in Finland (the company called Euroclear Finland Oy).

Central depositories keep specific lists of shareholders for every company that issues securities. These lists contain the name of the book-entry share’s owner, or the name of the party operating the nominee account. On request, the payor of the dividends has the right to obtain a complete listing of actual owners. Under provisions of the Companies Act, unless the shares are recorded in the book-entry system, limited companies’ Boards of Directors are under obligation to maintain a list of company shares, on the one hand, and a list of company shareholders, on the other hand. From the perspective of corporate law, the fact that the shareholder-beneficiary is on the company’s list of shareholders justifies the beneficiary’s right to get dividends.

The book-entry system contains the appropriate records entered in its client accounts. The main types of client accounts where holdings can be registered are: 

  • The Owner account
  • The Joint ownership account
  • The Nominee-registered owner account
  • The Custody nominee account

The Act on Book-Entry Accounts (827/1991) lays down detailed rules on client accounts and on the legal effects of the records made in them within the system.

The type of client account in the book-entry system also has an impact on taxation. Specific provisions of tax legislation control dividend payments effected by virtue of direct ownership and the situations where the reason for dividend payments is a nominee-registered client account, i.e. stockholdership in the name of a “nominee”. Read more in the following guidance:

If the company’s stocks are in the book-entry system, it means that the company has committed itself to follow the central securities depository’s rules and the decisions the depository makes in accordance with those rules. For example, in connection with corporate profit distribution processes, the rules can outline the division of responsibilities and the separation of tasks between the different parties. Not only the company but also the other parties concerned by the corporate profit distribution – such as account operators – are committed to adhere to the central securities depository’s rules and decisions.

Whether the dividend recipient is a resident or nonresident has an impact not only on the taxes assessed on the income but also on the payor’s responsibilities. From this, it follows that the payor must be aware of the dividend recipient’s tax status before paying the dividends.

Residents pay Finnish taxes on their income sourced to Finland as well as on their income sourced to other countries (= liability to tax on worldwide income). Nonresidents pay Finnish taxes on their Finnish-sourced income only.

Read more about determining the dividend recipient’s tax status.

Residency and non-residency of legal persons (= corporate entities) is discussed in greater detail in Resident and nonresident tax liability of corporate entities. For more information on the status of natural persons (= individual taxpayers), see Resident and nonresident tax liability and domicile according to tax treaty – natural persons.

For payors and dividend recipients that are Finnish, the income taxes on dividends are different for different dividend recipients:

  • Individual taxpayers and estates of deceased individuals;
  • Corporate entities;
  • Business partnerships.

For more information, see “Taxation of dividends” – Osinkotulojen verotus (detailed guidance in Finnish and Swedish). Read more about taxes on receipts of dividends when the dividend recipient is:

  • an individual taxpayer or a death estate (section 2 of the detailed guide)
  • a corporate entity (section 3)
  • a business partnership (section 4)

For some categories of payees, special tax rules apply. For example, our detailed guidance provides further information concerning income taxes imposed on investment funds (section 2 of the guide, on domestic funds), concerning income taxes imposed on diplomats and employees of international organisations (section 6.3 of the guide).

Not only inside Finland but also in international payments of dividends, the dividend recipient’s tax treatment varies depending on who the  dividend recipient is:

Special provisions of the Act on the taxation of nonresidents’ income allow for exemption from income tax on dividends if the  dividend recipient is a nonresident corporate entity (for more information, see Payments of dividends, interest and royalties to nonresidents, section 3.4.4 – Tax-exempt dividends); in addition, the comparability required by the European Union may lead to exemption (for more information, see section 3.4.5 – Tax-exempt dividends based on EU law comparability request).

A number of international treaties on taxation restrict Finland’s taxing rights. The treaties and conventions discussed here consist not only of the treaties on the avoidance of double taxation that Finland has signed with other countries, but also of several agreements made with international organisations, which often contain restrictions and other agreed guidelines on how taxes should be levied on income and property.

Read more on Finland’s double tax treaties.

Already at the stage when paying the dividends and withholding tax on them, the payor of dividends can withhold a lower amount in compliance with an international agreement. However, the dividend recipient must provide the necessary evidence to prove that the international agreement’s conditions have been met. If the payor receives no evidence or if the  dividend recipient’s rights to lower withholding rate are still unclear despite the evidence, or the matter is open to interpretation, the payor needs to withhold tax in the usual way in accordance with the provisions of the Act on the taxation of nonresidents’ income. For more information about the tax to be withheld at source, see the guide’s section 2.2 – Tax at source on dividends in accordance with the provisions of the Act on the taxation of nonresidents’ income.

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The source has an impact on Finnish tax residents’ income taxes. In accordance with the source-of-income division, received dividends can be taxable under the provisions of the Act on income taxation, or they can be deemed business income, or they can be deemed income connected with agriculture. However, the payor making the withholdable payment of the dividends needs not be concerned with how the source of income is determined when Finnish tax authorities carry out the resident dividend recipient’s income-tax assessment.

The different parties involved in dividend payments, and the responsibilities of each party

The process of dividend distribution generally involves several different roles. However, in very simple terms, only two parties are involved in the process: the payor and the recipient. This is typically the case when a small limited-liability company is distributing dividends because there are but a few shareholder-beneficiaries and because it is usual for these companies to handle their bookkeeping and tax accounting independently, without outsourcing it. On the other hand, the circumstances are quite different when a listed company with its shares recorded in the Book-entry system distributes dividends: the list of parties concerned are the payor or issuer company itself, the Central securities depository, several account operators, a large quantity of recipient of dividends, and often there are custodians or intermediaries outside Finland.

The following is an outline of the different parties involved, including references to their tasks, obligations and responsibilities.

All references to ‘payor’ here are intended to mean the company distributing dividends. If the Book-entry system is in use for the company’s corporate stocks, the word ‘issuer’ can be used in parallel – also meaning the company distributing the dividends. In general, the tax guides and instructions released in Finland use the word ‘payor’ – maksaja; betalare.

In principle, payors have the following responsibilities:

The party having the primary fiscal liability and the information-reporting requirement is the company distributing dividends. For companies using the book-entry system, it is normal that the services provided by account operators include the withholding of taxes and all the related reporting to the Tax Administration. However, when paying dividends distributed by a stock-exchange-listed company to a nonresident in situations where the underlying stocks are nominee-registered, a set of responsibilities and obligations laid down in tax legislation also concern the authorised intermediaries handling the transactions.

For Finnish issuer companies, the responsibilities under law are unchanged regardless of whether the stock issue had taken place at a central securities depository in a foreign country or at a Finnish securities depository.

For purposes of income taxes, corporate entities founded or registered in foreign countries, that have their place of effective management located in Finland (within the meaning of § 9, subsection 1 of the Act on income tax) are equated with Finnish payors of dividends. This means that the above entities have an obligation to withhold taxes and an information-reporting requirement no different from the obligations imposed on Finnish companies. However, an important factor that determines the way taxes are withheld and how much should be withheld is whether Finland also is deemed to be the entity’s “treaty” country of residence.

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Generally, the recipient of dividends’ can be defined as a shareholder registered in the company’s list of shareholders. Exceptions include situations where a manager of nominee-registered holdings is registered in the company’s list of shareholders in place of the actual shareholder. There may be other exceptions (such as dividend distributions to a shareholder-beneficiary based on his or her work efforts, and payments of dividends to non-shareholder parties).

Moreover, payors need to be aware in situations where treaty benefits are being claimed that the recipient may be different from the ‘beneficial owner’ the treaty refers to. Articles of tax treaties normally restrict the treaty benefits, which means that the benefits can be granted to the beneficial owner only. Read more about the concept of beneficial owner of the income in the detailed guidance Payments of dividends, interest and royalties to non-residents 2.1.2 – Requirements for applying tax-treaty benefits.

Residents as a recipient of dividend income, a resident’s obligations are:

  • to inform the Tax Administration of the receipts of dividends on their tax return, or
  • to check the entries of the resident’s pre-completed tax return (natural persons) in order to make sure that the payor has provided correct information the Tax Administration.

Nonresidents as a recipient of dividend income, a nonresident taxpayer’s obligations are:

If the dividend recipient provides wrong information to the tax authorities, the possible consequences include taxation by imposed taxes (instead of self-assessment), a punitive tax increase, and late-payment penalty charges. If the wrong information was connected with an intention to avoid taxes, this may result in criminal punishment (due to tax fraud).

The party working in co-operation with the central securities depository is an account operator in a situation where a licence is issued by the securities depository for making records and entries in the book-entry system, to open client accounts there and to conduct various transactions as determined by law and the relevant other regulations.

For companies using the book-entry system, it is normal that the services provided by account operators include the withholding of taxes and all the related reporting to the Tax Administration. However, under Finnish tax legislation, account operators have no tax liability. Certain account operator also act as authorised intermediaries. This may result in the account operator having to assume liabilities and responsibilities as defined by law.

An authorised intermediary is an intermediary with a currently valid registration in the Tax Administration’s register of authorised intermediaries. Examples of intermediaries include credit institutions, investment service companies and central securities depositories.

Authorised intermediary can assume responsibility, on its client’s behalf, for performing the tasks and duties relating to the payments of dividends and to the granting of treaty benefits and other benefits concerning tax withholding at source. The responsibilities and liabilities of authorised intermediaries concern dividends distributed by listed companies when the shareholder has a nominee registration and the payment goes to a nonresident taxpayer.

Read more in detailed guidance: Authorised Intermediaries’ responsibilities and liabilities.

What is meant by ‘contractual intermediary’ is a member not having a valid registration in the Tax Administration’s register of authorised intermediaries, in the custody chain of a nominee-registered shareholding arrangement.

The Central Securities Depository is the organisation referred to in the Act governing the Securities Depository System and the clearance system. The Central Securities Depository of Finland maintains the Book-entry system where accounts can be opened for registering limited-liability companies’ stocks and other securities, often called “book-entry shares”. The statutes of the central securities depository define how payments of dividends should be effected when any of the companies that use the book-entry system distribute dividends.

Responsibilities of the central securities depository include the requirement to provide the Tax Administration with information concerning:

  • substitute payments of dividends
  • the owners of book-entry shares, the recipients of various forms of yield, and the securities currently recorded in the book-entry system
Page last updated 1/9/2024