The impact of the rulings KHO 2010:15 and KVL 21/2011 on the taxes on receipts of dividends by EU/EEA residents — Case-law on the tax assessment of the income of foreign investment funds

The Finnish Tax Administration releases this English translation of instruction no 404/37/2011, dated 30 May 2011.

Click this link to go to the official instruction, record no 404/37/2011, languages Finnish and 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

This memorandum is an update to the earlier memorandum no 665/37/2010, dated 24 June 2010, the purpose of the update being to add a discussion of the impact of the Central Tax Board ruling no 21/2011. (The Central Tax Board = keskusverolautakunta in Finnish; centrala skattenämnden in Swedish.)

The impact is discussed below of the Supreme Administrative Court ruling (KHO 2010:15) and the Central Tax Board ruling (KVL 21/2011, final legal force has been gained) on the tax payable on the receipts of dividend of a nonresident within the EU/EEA territory (Act on the Taxation of Nonresidents' Income, Lähdeverolaki in Finnish). Additionally, observations on the Supreme Court ruling KHO 12.3.2010/470 are included.

The positions of the Finnish Tax Administration are explained below on questions of applicability of the rulings to practical tax-assessment situations. 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 foreign entities will make it easier to determine whether various entities will be treated as look-through vehicles or as separate taxpayer entities. The future list will not be intended as an exhaustive directory.  In situations that remain unclear, the taxpayer or the withholding agent remitting the tax can request a preliminary ruling from the Tax Administration unit, or from the Central Tax Board. Advance rulings are not free of charge.  

No changes to the instructions given to payors of dividend are included in this memorandum. To look up the current instructions, see article Precise information > International tax situations > Capital income > Dividends, interests and royalties of nonresidents.

2. Supreme Administrative Court ruling KHO 2010:15

This 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, it is prohibited at the outset to impose restrictions against the setting up of business in any member state (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, when the national legislation exempts 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 a 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 ruled, in 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 the European freedom of establishment.

3. Situations in which this case-law is applicable

The relevant Finnish Act, the Act on the Taxation of Nonresidents' Income, Lähdeverolaki, had been amended prior to the ruling. 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 was amended, i.e. prior to 1 January 2009. For this reason, the explanation below will discuss the periods up to 1 January 2009 separately from the discussion of periods as of 1 January 2009.

Using the 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 on the Taxation of Nonresidents' Income 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#3. 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 the existence of foreign legislation bound to be amended.
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 Act - Footnote#4. 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 thus it is not a question of a flow-through vehicle 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 on the Taxation of Nonresidents' Income. In reference to the 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), and the requirements of Act are met (e.g. the beneficiary also directly owns at least 10% of the capital in the company paying out dividend).

Currently valid tax treaties with various countries may also restrict Finland´s exercise of its taxing rights defined by the Finnish Act on the Taxation of Nonresidents' Income. For more information, see Tax rates on dividends and other payments from Finland to non-residents.

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

Under § 3, Act on the Taxation of Nonresidents' Income (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 some situations, no Finnish tax should be withheld at source, regardless of the provision § 3, Act on the Taxation of Nonresidents' Income. The ruling bears similarity with the Central Tax Board's advance ruling no 27/2008, that in some situations, no Finnish tax at source is to be levied. The 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. Ruling KHO 2010:15 does not change the existing standpoint of the Tax Administration. For more information, read official instruction no 1641/37/2008, 25.11.2008 Nonresidents' dividends from Finland - new tax rules.

As previously, the 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 in EU/EEA (not Liechtenstein), and
• No full credit for the Finnish source tax is received in the country of tax domicile.

4. Supreme Administrative Court ruling, advance ruling of the Central Tax Board, 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. Some 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 other funds can be incorporated, i.e. set up by articles of association, which means that a collective investment company has been formed as a separate legal entity. The contractual-fund principle is followed in 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, the 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, the 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 investment company which is incorporated). 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 'sijoitusrahastot' — investment funds).

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 the case-law, which is developed through court cases over the years.              

In light of the Central Tax Board ruling no 21/2011, a foreign UCITS-type investment fund (in reference to Council Directive 85/611/EEC) that has been set up on a contractual basis and under the rules of contract law, with basic characteristics similar to those of a Finnish investment fund, is not liable to pay tax in Finland on its Finnish-sourced income, under the provisions of § 20, subsection 1.2, Income Tax Act (TVL).  

5. Refunds of tax withheld at source

If too much tax has been withheld, the taxpayer or representative should complete the usual application form no 6203a (Application for refund of Finnish withholding tax). The deadline for the requests for refund of any tax at source that has been withheld excessively is before five calendar years have elapsed after the year of withholding. (§ 11, subsection 2, Act on the Taxation of Nonresidents' Income).

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.