Before paying dividends to dividend recipients

The payor company, account operator or authorised intermediary needs to determine before paying the dividends whether the natural person or estate of a deceased person is a resident or nonresident taxpayer. This is determined in accordance with the provisions of Finnish internal legislation, on an exclusive basis. In other words, the provisions of tax treaties have no impact on how the recipients’ status of tax liability is determined. Moreover, payors also need to note that the dividend recipients may be resident taxpayers for part of the year and nonresident for part of the year. The payors must determine the tax status that prevails at the time when dividends are paid.

For more information on how natural persons’ tax liability status is determined and on the impact of tax treaties, see Tax residency, nonresidency and residency in accordance with a tax treaty – natural persons.

Certain special rules laid down in national legislation may apply on natural persons (including special groups of beneficiaries of dividends defined in the Act on income tax). In addition, the provisions of international treaties may apply.

Read more

• about the special groups of taxpayers under Income tax act in the detailed guidance Tax residency, nonresidency and residency in accordance with a tax treaty – natural persons, section 4 – Special groups laid down in the Income Tax Act
• about the provisions of international treaties Withholding tax at source on dividends, interest and royalties, and the payor’s obligations, section 1.4 – Tax-at-source benefits when making a payment

Resident individuals i.e. natural persons

 A natural person is a resident taxpayer in Finland if the natural person resides in Finland. In accordance with the provisions of the Act on income taxation, individuals i.e. natural persons are considered to reside in Finland and thus resident taxpayers, when:

• they have their main abode and home in Finland; or
• they have a permanent home abroad but they reside in Finland for more than six months e.g. due to work, in which case a temporary absence is not considered as interrupting such a continuous period of residency; or
• they are Finnish citizens residing abroad who moved abroad less than three years ago and who have not demonstrated that they did not have substantial ties with Finland during the tax year; or
• they are Finnish citizens on a diplomatic mission abroad; or
• they are Finnish citizens employed by Business Finland abroad who were resident taxpayers in Finland immediately prior to the start of the employment abroad; or
• they are Finnish citizens in permanent full-time employment of the Finnish Government or specific international organisations abroad who were resident taxpayers in Finland immediately prior to the start of the employment abroad and who have not demonstrated that they did not have substantial ties with Finland during the tax year.

Estates of deceased persons are resident if the decedent had lived in Finland at the date of his or her death.

Resident taxpayers pay taxes in Finland for income earned in Finland and income earned in other countries (= liability to tax on worldwide income). If a natural person is a resident taxpayer in two countries at the same time, the country of residence for purposes of the applicable tax treaty will be determined using the criteria laid down in the tax treaty. In these circumstances, if the natural person is a beneficiary of dividend income, a claim must be submitted to the Tax Administration for treatment based on residency pursuant to a tax treaty. For more information, see Tax residency, nonresidency and residency in accordance with a tax treaty – natural persons, section 6.2 – Request on residency pursuant to a tax treaty.

Natural persons who are nonresidents

Individuals who do not meet the characteristics of a resident taxpayer are nonresidents.

Nonresidents are liable to pay tax in Finland only on their income earned in Finland. If someone is a nonresident taxpayer in Finland, he or she cannot be considered a resident of Finland pursuant to a tax treaty. In these circumstances, they can be treated as resident of the other contracting state unless there is reason to believe that they do not have tax liability for worldwide income in the other contracting state either.

Read more about how a natural person can request for tax treatment as a nonresident, and about tax withholding at source on  dividends paid to a nonresident natural person, in the detailed guidance Tax residency, nonresidency and residency in accordance with a tax treaty – natural persons (section 6.1 – Request for treatment as nonresident taxpayer).

Read more about distributing dividends to natural persons.

The payor company, the account operator or authorised intermediary providing services to the company needs to determine before paying the dividends whether the corporate recipient is a Finnish resident taxpayer or a nonresident corporate entity. For more information on how the status of corporate entities is determined and on the impact of tax treaties, see Resident and nonresident tax liability of corporate entities.

When you are in the role of the payor, and you need to determine whether a corporate recipient is a resident or nonresident, we recommend that you pay special attention to the following matters:

• Firstly, the provisions of Finland’s legislation determine exclusively whether a corporate entity is a Finnish resident or nonresident.
  • Hence, the provisions of any tax treaty are of no significance in this regard.
• A nonresidency status is not dependent on tax year or determined separately for each tax year.
  • Accordingly, there may be corporate entities that are deemed Finnish residents for part of a year and nonresident for the rest of the year. Read more about when a corporate entity starts being treated as a resident taxpayer in Resident and nonresident tax liability of corporate entities, section 6.1 – Start date of the company’s residency status.
• Between resident and nonresident taxpayers there are important differences in the scope of tax liability and the assessment procedure.

Special provisions of national legislation (such as investment funds, withholding tax benefits according to the Act on the taxation of nonresidents' income) or provisions of international treaties may also apply on corporate entities.

Read more about

• taxes imposed on investment funds in On the taxation of investment funds and the provisions of section 20a of the Income Tax Act, section 2 – Domestic funds
• tax at source benefits according to the Withholding Tax Act in Withholding tax at source on dividends, interest and royalties, and the payor’s obligations, section 2.4.1 – Tax at source benefits
• the impact of international treaties in Withholding tax at source on dividends, interest and royalties, and the payor’s obligations, section 1.4 – Tax at source benefits when making a payment

Definition of ‘corporate entity’ in the Act on income tax

Under the provisions of § 3 of the Act on income tax, ‘corporate entity’ refers to:

• The State of Finland and the institutions belonging to the State;
• Wellbeing services counties and joint authorities for health and wellbeing;
• Municipalities and joint municipal authorities;
• Church parishes and other religious communities;
• Limited-liability companies, cooperative societies, savings banks, mutual investment funds, UCITS funds, universities, mutual insurance companies, community grain-bank organisations, ideological or economic associations, and foundations and institutions;
• Death estates from other countries, and
• Other legal persons comparable to above, or other sets of assets that have been dedicated for a special purpose.

Foreign taxpayers are treated as corporate entities for Finnish tax purposes if the authorities have determined that the foreign taxpayer is an entity comparable to those listed above. When Finnish public authorities test whether a particular foreign corporate entity – or a set of assets – should be deemed comparable to the Finnish entities, the primary focus is whether the foreign entity’s position from a civil-law perspective is the same as that of a Finnish entity listed above. Read more about the payor’s obligations related to above circumstances in Withholding tax at source on dividends, interest and royalties, and the payor’s obligations, section 1.3 – General tax at source pursuant to section 7 and section 2.4 – Tax at source benefits based in national legislation or EU law.

Resident corporate entities

Finnish corporate entities are always seen as resident taxpayers. ‘Finnish corporate entity’ is an entity founded or registered in accordance with Finnish legislation.

Foreign corporate entities can be resident taxpayers in Finland only if the entity’s place of effective management is in Finland. Read more about what is deemed a “place of effective management” in Resident and nonresident tax liability of corporate entities (section 5 – Place of effective management).

Moreover, the activities of a foreign corporate entity in Finland can constitute a permanent establishment for the entity in Finland for income tax purposes, even if the actual place of management of the entity is not in Finland. In these circumstances, the way the dividends are taxed will depend on whether the dividend income is considered to be attributable to the income of the permanent establishment. For more information on what constitutes a permanent establishment in Finland and on the related income taxation, see Income taxation of nonresident foreign corporate entities – Business income and other income from sources in Finland.

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). If in addition to Finland, a corporate entity is simultaneously a resident taxpayer in another country as well, the country of residence “for treaty purposes” will be determined using the criteria laid down in the applicable treaty. Read more about how the country of residence is determined in Resident and nonresident tax liability of corporate entities, section 7 – Impact of tax treaties on how taxing rights are divided between Contracting States.

Although the receipts of dividends were subject to tax for the company being the beneficiary, the payor is not to withhold any amounts when paying the dividends as the beneficiary is a resident corporate entity. Read more on dividends distributed to corporate entities.

Nonresident corporate entities

Nonresident corporate entities are those that were set up or registered in other countries and have their place of effective management elsewhere, not in Finland, so they cannot be treated as Finnish resident entities. However, the activities of a foreign company in Finland can constitute the company to have a permanent establishment in Finland in income taxation even if the company’s place of effective management is not in Finland. In these circumstances, the way the dividends are taxed will depend on whether the dividend income is considered to be attributable to the income of the permanent establishment. For more information on what constitutes a permanent establishment in Finland and on the related income taxation, see Income taxation of nonresident foreign corporate entities – Business income and other income from sources in Finland.

Nonresident corporate entities must pay tax to Finland on income only on the income it receives from sources in Finland. The payors of dividends must withhold tax at source when paying dividends to a nonresident corporate entity. Firstly, the amount of withholding tax to be withheld is affected by whether the corporate entity is comparable to a Finnish corporate entity referred to in Section 3 of the Income Tax Act (see the list above). In order for the payor to be able to evaluate comparability to a Finnish corporate entity, the foreign recipient can provide the payor with its trade register extract or with a certificate issued by the tax authority of a foreign country. Alternatively, the payor can use public data sources for checking the legal form of the foreign corporate entity. The actual amount to be withheld at source may additionally be affected by the foreign corporate entity’s rights to exemption, which can be based on national legislation or on an international convention. Read more about tax withholding at source.

Read more about how recipients can be entitled to exemptions in Withholding tax at source on dividends, interest and royalties, and the payor’s obligations, section 1.4 – Tax at source benefits when making a payment.

For tax purposes, the following are partnerships:

1. Business partnerships, which means general partnerships and limited partnerships, maritime shipping entities, and any consortia, which are non-corporate entities that two or more persons have founded in order to conduct business for the benefit of the founders;
2. Taxation partnerships, which means agricultural partnerships, forestry partnerships and joint administrations of a real estate unit (consortia, which two or more persons have founded in order to conduct farming or farm management, to conduct forestry or management of a unit of real estate for which the consortium is liable to pay value-added tax or for which the consortium has submitted an application for VAT liability due to offering immovable property for rent);
3. Estates of deceased persons in Finland, if they carry out a business operation (starting the 4th year of activity);
4. Foreign partnerships; and
5. European Economic Interest Groupings (EEIGs). A ‘European Economic Interest Grouping’ is a consortium for economic activity to be pursued in co-operation, founded by at least two companies or natural persons that reside in different EU countries. The interest grouping may be based in Finland or outside Finland.

For purposes of tax assessment, partnerships are seen as flow-through entities, fiscally transparent. This means that a partnership, in itself, cannot be regarded as a resident taxpayer nor a nonresident taxpayer. When the recipient is a partnership, the income-tax assessment is based on imposing tax on each owner.

However, the payor of dividends must  determine whether the partnership is a Finnish or foreign partnership.

Finnish partnerships

The following are domestic partnerships: general partnerships, limited partnerships and shipping companies under joint ownership, having their registrations in Finland and having been founded in accordance with Finnish legislation. When the recipient of dividends is a domestic partnership, the payor is not to withhold any amounts when paying the dividends.  If a domestic partnership’s owner is a nonresident taxpayer, income taxes are imposed on that shareholder in accordance with the provisions of the Act on the taxation of nonresidents’ income. Read more about how taxes are imposed under the provisions of the Act on the taxation of nonresidents’ income in Payments of dividends, interest and royalties to non-residents, section 6.3 – Imposing unwithheld tax on the income recipient.

Read more about taxes on dividends distributed to business partnerships. For more detailed information , see “Taxation of dividend income” — Osinkotulojen verotus, section 4 – Tax treatment of the dividend income received by business partnerships (in Finnish and Swedish).

Foreign partnerships

Business partnerships registered in other countries or established under the laws of a foreign country – not Finland’s legislation – are foreign partnerships. Generally, the payors must withhold tax at source when paying dividends to a foreign partnership.

Foreign partnerships may be treated as flow-through entities in their country of residence, in which case the applicable tax treaty  will depend on the different owners’ countries of residence. For more information on the concept of ‘resident individual of the other Contracting State’ and on the withholding at source from income paid to a foreign partnership, see Payments of dividends, interest and royalties to nonresidents.

The dividend recipient may be entitled to a lower tax at source rate or an exemption from tax at source based on:

• National legislation
  • It is possible that a Finnish legal provision defining the dividend recipient’s liability to taxes applies (such as § 12 of the Act on income tax, which provides exemption to diplomats and those working for an international organisation), or provisions of the Act on income tax may define the dividend recipient as a party enjoying full or partial exemption from income taxes (such as an investment fund referred to in § 20 a of the Act on Income Tax, or such as a non-profit organisation referred to in § 22).
    • Read more about special taxpayer groups defined in the Act on Income Tax (natural persons) in the detailed guidance Tax residency, nonresidency and residency in accordance with a tax treaty – natural persons, section 4 — Special groups laid down in the Act on income taxation
  • It may be that a special tax rule set out in the Act on the taxation of nonresidents’ income applies (such as a corporate entity residing in the European Economic Area, in reference to § 3, subsection 5 of the Act on the taxation of nonresidents’ income)
    • Read more about  the conditions for applying tax at source benefits based on section 3 of the Act on the taxation of nonresidents’ income in Withholding tax at source on dividends, interest and royalties, and the payor’s obligations, section 2.4.1 – Tax at source benefits.
• a tax treaty
  • When dividends are paid, the lower tax rate set in the relevant tax treaty can be applied if the payer has received a declaration from the dividend recipient regarding their right to treaty benefits.
    • The most important condition to be fulfilled in this context is that the dividend recipient is a treaty resident of the other Contracting State and simultaneously the beneficial owner referred to in the tax treaty. However, to apply the provisions of tax treaties always also require that any other provisions included in the treaty will be fully accounted for. Read more in the detailed guidance Payments of dividends, interest and royalties to non-residents, section 2.1.2 – Requirements for the application of tax treaties: Resident individuals of a Contracting State and the Beneficial owner of the income.
    • Payors are required to ensure that treaty requirements are fulfilled on a case-by-case basis, determining this separately for each payment and for each one of the tax treaties. The tax treaties Finland has signed with other countries are listed in Tax treaties.
    • The payor must also take account of the fact that no tax at source benefit can be granted for income if, based on the information that the payor or the service provider acting on their behalf has, the Principal Purpose Test provision in the tax treaty or a national tax evasion provision may be applied to the granting of the benefit. If the payor deems that a tax evasion provision could be considered applicable in the situation, it is recommended that the matter be verified beforehand, for example by applying for an advance ruling.  The Principal Purpose Test provision of tax treaties and its application is discussed in more detail in the Tax Administration’s guidance Articles of tax treaties.
  • Read more about when the requirements are fulfilled for applying the provisions of a tax treaty in Withholding tax at source on dividends, interest and royalties, and the payor’s obligations, section 2.3 – Treaty benefits during the year of payment, and in Tax rates on dividends and other payments from Finland to nonresidents.
• An international treaty or convention other than a tax treaty
  • These kinds of international conventions may concern, for example, an international organisation.
    • For example, according to article 2, section 7 of the Convention on the Privileges and Immunities of the United Nations, its assets, income and other property are exempt from all direct taxes.
  • For more information on international conventions, visit Finlex.fi.
• EU law
  • For example, the emergence of sufficient comparability with a Finnish legal entity, organisation, corporation, etc. Read more about this in the detailed guidance Withholding tax at source on dividends, interest and royalties, and the payor’s obligations, section 2.4.2 Equivalence with a corresponding Finnish operator.

In these circumstances, the standard requirement is that the dividend recipient should provide evidence on their right to the tax at source benefit. The payer must review and make the checks that are necessary to determine that the evidence provided meets the requirements set for granting the benefits. No benefits – i.e. no lower withholdings – are allowed if the payor has not received sufficient evidence concerning the requirements, or if the dividend recipient’s rights to the benefit are still unclear or subject to interpretation. To solve the problem, the payor can demand that the dividend recipient submit an application to the Tax Administration for a tax card (tax-at-source card); or the payor can demand that the dividend recipient submit an application to the Tax Administration for an advance ruling.