Nonresidents' dividends from Finland - new tax rules
- In force until further notice
This article is the translated version of instruction no 1641/37/2008, dated 25 November 2008: "Muutoksia rajoitetusti verovelvollisen osinkotulon lähdeverotukseen -- Changes in tax-at-source obligations of nonresidents receiving dividend income".
This memorandum will discuss the effects of recent judgments on the taxation of Finnish tax nonresidents who receive or have received income. The judgments are: Finland´s Central Tax Board, KVL 27/2008; Finland´s Supreme Administrative Court, KHO 2008:23; and European Court of Justice, Stauffer, ECJ C-386/04. The applicable Finnish legal statute is the Act governing tax at source (LähdeveroL; Källskattelagen). It is emphasized that the judgments will change the practices of tax assessment in this regard, and they often lead to diminution of the source tax payable to Finland.
Based on the Finnish judgments KVL 27/2008 and KHO 2008:23, Finland´s Parliament is processing an amendment (HE 113/2008) to the laws governing the tax assessment of nonresidents. Nevertheless, the Cabinet´s proposal for amendment does not explain how the new rules should be applied to earlier tax years, because it only concerns payments of dividend as of 1 January 2009. For this reason, this memorandum is intended to give a guideline regarding the effects of EU law on Finnish source taxes for the earlier tax years, not governed by the Cabinet´s proposal for amendment, and the principles outlined by it. Consequently, this memorandum concerns receipts, up to the end of 2008, of dividends in the hands of nonresidents.
No changes to the instructions given to payers of dividend are included in this memorandum. Thus, instruction Dividends, interests and royalties of nonresidents will remain in force.
Receipts of dividend by a foreign corporate body
Judgment KVL 27/2008 (which has gained legal force) states that no source tax could be withheld from payments of dividend by a Finnish nonlisted company to a Swedish company, because similar transactions within Finland, of paying out dividend from a Finnish nonlisted company to a Finnish company, would be exempt from tax.
The Finnish Tax Administration´s viewpoint is that no tax is payable for dividend (Note 1), paid out to a Finnish nonresident corporate body under circumstances, where a similar dividend would be exempt (under § 6 a, Business Tax Act (EVL)), if paid out to a resident corporate body in Finland. Further preconditions for the exemption are the following:
a) Place of residence of the foreign corporate body is EEA (except Liechtenstein), and
b) No full credit for the Finnish source tax could be available (Note 2) in the country of tax residence.
Receipts of dividend by a nonresident individual
Judgment KHO 2008:23 includes the conclusion that a Finnish tax nonresident living in the United Kingdom cannot be liable to more tax on his dividend income than what a Finnish resident would have to pay in a similar situation.
The Finnish Tax Administration´s viewpoint is that on request by the nonresident individual concerned, taxation in respect of his dividend income can be carried out in a similar way as if the dividend recipient were a Finnish resident, under the following preconditions:
a) The nonresident individual´s tax domicile is EEA (except Liechtenstein), and
b) No full credit for the Finnish source tax could be available (Note 3) in the country of tax residence.
1. The same principle that concerns dividends will be applicable to the taxation of receipts of interest on investment in a cooperative in its various forms, profit-sharing and interest on investment in the founding capital of a Finnish savings bank, including its additional capital, and interest on guarantee capital in mutual insurance companies and insurance associations.
2. Actual availability of full credit for the Finnish source tax is regarded as valid if Finnish source tax can be credited from home-state taxes during the tax year of declaring the dividend income to the tax authority, or during any other subsequent tax year, pursuant to the provisions of the Convention for the avoidance of double taxation between the country of tax residence and Finland.
3. See Note 2.
Effects of judgments KVL 27/2008 and KHO 2008:23 on tax assessment for previous years
After the latest reform of dividend tax came into force in Finland as of 1 January 2005, the tax system has no longer granted imputation credit in respect of corporate tax. The previous system always viewed receipts of dividend as taxable income in the hands of a physical person and also, if the recipient was a corporate body. Tax credits were granted to dividend recipients to compensate for paid-in corporate tax. However, the judgments KVL 27/2008 and KHO 2008:23 are based on the new, current tax rules, effective 1 January 2005, which prescribe various situations where dividends may be fully or partly exempt from tax. Because the current tax rules are very different from the old rules, judgments KVL 27/2008 and KHO 2008:23 cannot be applied to the (pre-2005) period when imputation system was available.
The Finnish Tax Administration´s viewpoint is that judgments KVL 27/2008 and KHO 2008:23 do show a set of valid principles, applicable to the processing of taxpayers’ appeals regarding source tax, nevertheless, those principles cannot be utilized if the taxpayer’s appeal does not involve a dividend payment taking place 1 January 2005 or later. If source tax has been withheld on dividends from Finland, the recipient can later submit a claim for refund to the Finnish Tax Administration. The necessary document is form Veroh 6203. The claim should include an explanation of the taxation of the receipts of dividend in the country of tax residence, which should be endorsed by the tax administration of the country.
Receipts of dividend by nonprofit organisations
Pursuant to Article 56 of EC Treaty, no restrictions are allowed on the free movement of capital from one member state to another. Furthermore, the principle derived from the ECJ ruling C-386/04 shows that no source tax should be levied on amounts paid out to a nonprofit body of another member state, if the income would have been exempt from tax if received by a nonprofit body of Finland (for more information on the ECJ ruling, see Stauffer C-386/04).
The Finnish Tax Administration´s viewpoint is that no tax is payable on the income received by a foreign corporate body residing in EEA (with the exception of Liechtenstein), it fulfills the requirements of nonprofit activity for the public good (§ 22 and § 23 §, Income Tax Act (TVL)), and if the income would be tax exempt if received by a Finnish nonprofit corporate body. In this connection, no importance is attached to the place where the corporate body carries out its activities. Furthermore, not only dividends, but also other types of income can be exempted from tax in this way.
Pursuant to § 22.1, Income Tax Act (TVL), a corporate body is acceptably promoting for the public good, if
- It exclusively and directly serves the public interest, including variations as to the material, spiritual, educational or social character of the public interest,
- Its lines of activity are not restricted to a limited group of citizens, and
- The corporate body makes no profit for its members or participating persons in the form of distributable funds, oversized wages or any other form of compensation.
The ECJ ruling shows a set of valid principles, applicable to the processing of taxpayers’ appeals regarding source tax. The deadline for handing in a claim against a levied source tax extends to five years subsequent to the year of withholding (§ 11.2 Act governing tax at source). If the claimant is a nonprofit corporate body, an explanation should be enclosed regarding the nature of its activities to demonstrate its promotion of public interest. For more information on the definition of public interest, see the original Finnish-language instruction no 384/349/2007, 30 April 2007: Verotusohje yleishyödyllisille yhdistyksille ja säätiöille.
Foreign investment companies
The Supreme Administrative Court of Finland has recently requested for an advance ruling from the European Court of Justice in respect of case KHO:2007:42, which deals with a foreign investment company. Therefore, the Supreme Administrative Court will not pass judgment on the case before the European Court of Justice (where the issue has been recorded as no C-303/07) has given its response. The Finnish Tax Administration will take account of the future ruling, if it is regarded as a relevant judgment from viewpoint of applicability of tax legislation.