Impact of court ruling 2010:15 on taxes on receipts of dividends by nonresidents

The Finnish Tax Administration releases this translation into English of instruction no 665/37/2010, dated 24 June 2010. Press the link below to read the original memorandum in Finnish/Swedish. This translation serves to facilitate general understanding of Finnish tax rules. Original, official instruction documents in Finnish or in Swedish have legal force. 

1 Introduction

The Finnish Tax Administration releases this translation into English of instruction no 665/37/2010, dated 24 June 2010. This translation serves to facilitate general understanding of Finnish tax rules. Original, official instruction documents in Finnish or in Swedish have legal force.

The recent ruling KHO 2010:15 of Supreme Administrative Court (Finland) is discussed in this memorandum. The case dealt with payments of dividend to a nonresident and the justifiability of Finnish tax levied at source when dividend is being paid to a taxpayer resident in EU/EEA countries (relevant legal statutes being Act on the Taxation of Nonresidents, and Act governing Tax at Source).  The final ruling of Supreme Administrative Court was handed down recently after the European Court of Justice had been consulted. The European Court of Justice gave a preliminary ruling (ECJ Aberdeen, C 303/07) on Supreme Administrative Court´s request. Furthermore, this memorandum also makes reference to the other recent official decision KHO 12.3.2010/470.

This memorandum examines the impact that should be attached to ruling KHO 2010:15 from the viewpoint of application of tax legislation. At a later stage, the Finnish Tax Administration is planning to publish a list of foreign entity forms, which on the basis of case-law or tax-assessment practice have a clearer, unambiguous tax status in Finland. Listing these forms of entities will make it easier to determine whether foreign legal entities will be treated as look-through vehicles or as separate taxpayer entities. Regardless of the existence of such a list in the future, no changes will be made in any obligations that the beneficiary of income has; the beneficiary must still give all the necessary details, forms etc., to the payor and/or the Tax Administration. The future list will not be intended as an exhaustive directory.

No changes to the instructions given to payors of dividend are included in this memorandum. 

2 Ruling KHO 2010:15

The court case dealt with the taxation at source of dividend payments from Finland to a Sicav corporation resident in Luxembourg. Sicav is a foreign incorporated entity form (société d’investissement à capital variable, investment company with variable capital).

In the European Union, no restrictions between member states should be in force against setting up business companies (freedom of establishment). Pursuant to ECJ ruling C 303/07, EC Treaty articles 43 EC and 48 EC must be interpreted as precluding the national legislation of a member state, which exempts from withholding tax dividends distributed by a subsidiary resident in that state, but charges withholding tax on similar dividends paid to a parent company in the form of Sicav, resident in another member state (for more information, see Case Aberdeen, C 303/07).

Similarly as the European Court of Justice, the Finnish Supreme Administrative Court decided, in ruling KHO 2010:15, that payments of dividend to a Finnish tax nonresident, which is a Sicav corporation resident in Luxembourg (domicile in EU/EEA), cannot be subject to the withholding of tax at source in Finland, because similar dividend payments to a Finnish joint-stock company would be exempted from tax. EC Treaty articles 43 EC and 48 EC should rule out the national legislation, because the latter would restrict freedom of establishment.

3 Situations requiring practical application

The Finnish Act governing taxation at source had been amended prior to the ruling of Supreme Administrative Court. The amendment applies to any dividend payment taking place 1 January 2009 or later. It should be noted that the ruling of Supreme Administrative Court dealt with the old provisions that were in force before the Act governing taxation at source was amended, i.e. prior to 1 January 2009. For this reason, the explanation below will separately discuss the periods up to 1 January 2009 and after 1 January 2009.

Using SAC ruling as a guideline, periods as of 1 Jan 2009

Payments of dividend to a (nonresident) foreign company will be exempt from tax, under § 3, Act governing taxation at source (Lähdeverolaki; Lagen om källskatt) only in the following circumstances:

1. Recipient of the dividend is appearing on the list of companies referred to in Article 2(a) of Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States. Furthermore, the recipient also directly owns at least 10% of capital in the company paying out dividend.
   
   OR ALTERNATIVELY:
2. Recipient´s tax domicile is in EU/EEA (except Liechtenstein - Footnote#1) and
   • Legal entity form is similar to a Finnish incorporated legal entity,
   • Similar dividend would be exempt from tax if paid to a Finnish corporate entity under § 6 a,  Business Tax Act (EVL),
   • No full credit (Footnote#2) can be made in the recipient´s country of tax domicile, as explained by the recipient, under the provisions of the Double Tax Convention between Finland and the recipient´s country of tax domicile.

Legal entity form can be regarded as similar to a Finnish incorporated legal entity if the foreign entity meets the requirements of provision § 3, Income Tax Act - Footnote#4. These foreign companies usually have to fulfill at least the following requirements:

• They are separate legal persons in their home countries;
• They are, under the applicable Double Tax Convention, regarded as residents of a contracting state, and thus entitled to the benefits of the Double Tax Convention.

However, careful and separate examination will be necessary for each case, because of the large number of various legal entities in foreign countries, because of the legislation varying from country to country, and because of foreign legislation that may be subject to amendments.

Dividends that match the characterization of § 6 a, Business Tax Act (EVL), are those which are not subject to tax under the very provision of § 6 a . This means distributions of profits to shareholders, usually by joint-stock companies, which are tax-exempt because multiple taxation would occur if they were taxable. Thus, under the official decision KHO 12.3.2010/470, profit distribution of a Sicav entity in Luxembourg can be regarded as a dividend distribution. Furthermore, receipts of dividend are taxable in the hands of the beneficiary, and the beneficiary cannot be regarded as a vehicle or unit that becomes looked through in taxation.

Consequently, payments of dividend to a foreign company (nonresident) will be exempt from tax at source in Finland, if the requirements are met as listed in § 3, Act governing taxation at source. In reference to legal provisions currently in force, and to ruling KHO 2010:15, no tax at source is to be levied on payments of dividend to a Sicav entity from Luxembourg, the dividends being within the definition of § 6 a, Business Tax Act (EVL). The requirements of Act governing taxation at source are met (e.g. the beneficiary also directly owns at least 10% of the capital in the company paying out dividend) in this case.

Valid Double Tax Conventions with various countries may also restrict Finland´s exercise of its taxing rights defined by Act governing taxation at source (for more information, see form 6214 (pdf), Tax rates on dividends and other payments from Finland to nonresidents).

Using SAC ruling as a guideline, periods before 1 Jan 2009 

Under § 3, Act governing taxation at source (prior to 1 January 2009), tax had to be levied at source on payments of dividend to a nonresident unless provided otherwise in the Act itself. The list of permissible exemptions included dividends payable to companies within the meaning of Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, if the recipient also directly owned at least 15% of capital in the company paying out dividend.

Ruling KHO 2010:15 shows the Court´s opinion that in certain situations no Finnish tax at source is to be levied, regardless of the provision § 3, Act governing taxation at source. The ruling bears similarity with Central Tax Board´s (keskusverolautakunta; centrala skattenämnden) advance judgment no 27/2008, that in certain situations, no Finnish tax at source is to be levied. The Finnish Tax Administration has already issued its instructive memoranda on the impact of Central Tax Board´s judgment 27/2008 on tax treatment during earlier tax years. The recent ruling KHO 2010:15 brings about no changes to the existing standpoint of the Finnish Tax Administration. For more information, read official instruction no 1641/37/2008, 25.11.2008 .

As previously, the Finnish Tax Administration continues to maintain that the requirements laid down by current, amended law may be applicable on tax assessment decisions made prior to 1 January 2009. The scope of application thus includes dividend payments to a nonresident corporate entity in situations, in which under § 6 a, Business Tax Act, the payment would be exempt from tax if it took place in Finland. The other preconditions are:

• The nonresident´s tax domicile is EU/EEA (except Liechtenstein), and
• No full credit for the Finnish source tax could be available in the country of tax domicile.

If there has been an excessive amount of tax collected at source, the usual request process of refund can be initiated. Fill out form 6203e, Application for refund of Finnish withholding tax. Requests for refund of any tax at source that has been withheld excessively can be submitted during the five calendar years following the year of withholding. (§ 11, sub-§ 2, Act governing taxation at source).

4 The SAC ruling and foreign investment funds

One of the important factors affecting the business of an investment fund is the nature of the scheme of pooled investment, which in turn is largely dependent on the legislation prevailing in the investment fund´s home country. Thus, funds within the meaning of the UCITS directive may coexist with other types of funds. Funds can be contractual funds, where the agreement made between the investor and other investors is in a central role (and an investment company is managing the funds), and they can be based on incorporated form, set up by articles of association, which means that a collective investment company has been formed as a legal entity. The contractual-fund principle is followed Finland, and as a result, there is always a Finnish fund-management company in charge of fund administration. However, there are several European countries with both contractual funds and incorporated investment companies in existence. 

Sicav is the abbreviation of the French words ´société d’investissement à capital variable´ (meaning ´investment company with variable capital´). The legal form of association called Sicav makes up a part of the pooled-investment system used in several countries including Italy, Austria, Luxembourg and France. In Luxembourg, available investment schemes also include the FCP form (fonds commun de placement), which is not discussed in the Supreme Administrative Court ruling. It should additionally be noted that the exact definition of Sicav may vary from country to country.

Consequently, the collective investment schemes in a foreign country are usually different from the schemes available to investors in Finland. Therefore, definitions of key concepts may vary greatly, and what may be viewed as an investment fund in one country may not acceptably fall into the same category as is defined by the Finnish classification of ´sijoitusrahastot´ — investment funds.

Supreme Administrative Court ruling KHO 2010:15 deals with a SICAV fund from Luxembourg. By virtue of the relevant ECJ ruling, this fund was regarded as comparable with a Finnish joint-stock company (an invest¬ment company in the form of a legal entity). Ruling KHO 2010:15 did not deal with a foreign investment fund that would be equated with a Finnish investment fund, and the ECJ ruling did not examine the dissimilarity between the Sicav legal form and Finnish investment funds. Furthermore, the distribution of dividend fell into the category of dividends within meaning of § 6 a, Business Tax Act (EVL), and the objectives of § 6 a as a legal provision include prevention of multiple taxation in certain situations. In the Court´s opinion, the Sicav legal form did not fall into the category of UCITS within the meaning of the UCITS Directive (Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)). Based on the above reasons, the KHO 2010:15 ruling will not have an impact on the taxation at source of dividend payments to foreign investment funds (within the meaning of the Finnish tax definition of ´funds´).

Furthermore, the Finnish Tax Administration has no knowledge of any other case-law that would unambiguously give explanation as to how a national legal provision, or EU law, could prevent the levying of tax at source on dividends payable to foreign investment funds. Existing case-law has not established any reason for justification for application of such a legal provision, which would fulfill the requirements of the EU proportionality principle. 

If payment is being made to a different entity type than what is discussed in ruling KHO 2010:15, the question of taxation in Finland should be separately decided, using a case-by-case approach. However, case-law from earlier years includes explanations of how some foreign entity types should be treated. It should be noted that legislation either in Finland or in the other state may have been amended after the time period concerned by case-law, which is developed through court cases over the years.

To give assistance to decision-making in these matters, the Finnish Tax Administration is planning to publish a list of foreign entity forms, which on the basis of case-law or tax-assessment practice have a clearer, unambiguous tax status in Finland. It is our recommendation that taxpayers involved in situations of ambiguity request for advance rulings from either the tax office in charge or from the Central Tax Board. 

FOOTNOTES:

Footnote #1: It is required that the tax domicile of the corporate entity is located in the EU/EEA, and that the country of tax domicile is covered by an agreement on mutual assistance and exchange of information in tax matters, or by the Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxes.

Footnote #2: Crediting is regarded as sufficient if the amount can be credited against the taxes payable in the domicile country either during the taxable year when the receipt of dividend was recorded as taxable income, or during any subsequent year under the provisions of the Double Tax Convention between Finland and the domicile country.

Footnote #3: The definition of ´yhteisö; samfund´ meaning corporate entity is found in § 3, Income Tax Act. The following lists of Finnish legal forms are included in subsections 4 and 7

• Joint-stock limited company, cooperative society, savings bank, investment fund, university fund, mutual insurance company, ideological or economic associations — in Finnish: Osakeyhtiö, osuuskunta, säästöpankki, sijoitusrahasto, yliopistorahasto, keskinäinen vakuutusyhtiö, lainajyvästö, aatteellinen tai taloudellinen yhdistys ja laitos.
• Other legal persons, comparable and similar to those listed above in 1-6, or a special collection of assets designed to fulfill a specific purpose.

Footnote #4: Under the provision § 6 a, in certain situations, receipts of dividend in the hands of corporate entities in domestic situations are not considered taxable income. These situations include the following (the list below does not include receipts of dividend from investment in corporate stock by banks, insurance companies, pension institutions and the exception granted to the Osuuspankki bank):

• Situations where a listed or nonlisted corporation distributes dividend to a listed corporation
• Situations where a nonlisted corporation distributes dividend to another nonlisted corporation.
• Situations where a listed corporation distributes dividend to a nonlisted corporation that directly holds at least 10% of the capital of the listed corporation paying out dividend.