Interest to be paid on a refund of taxes withheld at source

1 Introduction

This is an unofficial translation. The official instruction is drafted in Finnish and Swedish languages.

On 25 September 2013, the Supreme Administrative Court gave a ruling (KHO 2013:148) that concerns the refund interest payable to a nonresident corporate taxpayer when tax withheld at source is being refunded. The Court ruled that the principles of EU law require that an interest on a refunded tax at source must be paid to the beneficiary although the Finnish Act on the Taxation of Nonresidents' Income (Lähdeverolaki; Källskattelagen) does not require it.

After the ruling, the Finnish Tax Administration has changed its practice and started paying out interest on such refunds. This way, nonresident beneficiaries are treated the same as Finnish tax residents when they receive refunds.

The legal amendment (under the Government Proposal HE 95/2014) came into force at the beginning of 2015 and the new practice first applies to refunds relating to 2014 and the following years. However, because of the Court ruling, the Tax Administration pays interest also to refunds for the year 2013 or earlier if a claim for interest is lodged within the appeal period specified below.

2 Submitting a request for interest on refund

The Court ruling concerned a payment transaction within the European Economic Area, and it additionally dealt with a case of withholding of tax at source that was not in compliance with EU law. However, for practical reasons, the Tax Administration will pay interest on all refunds of taxes withheld at source, regardless of the beneficiaries' country of residence and regardless of the type of income received. Further, interest will accrue on the refunds paid on the basis of the double tax treaties as well as on refunds based on the Finnish national legislation.

The new practice is automatically implemented by the Tax Administration when it processes the refund applications that are still pending. Those previously given refund decisions that do not include any interest must be appealed within the applicable appeal period, if the beneficiary i.e. applicant considers that it is entitled to the interest.

According to the Act on the taxation of Nonresidents’ Income if too much tax has been withheld at source, the beneficiary may ask for a refund during the five calendar years that follow the year of withholding. An appeal against the refund decision, including unpaid interest, must be lodged within the five calendar years that follow the year when the decision was made.  For the calculation of interest a corporate entity, as the beneficiary and applicant, must submit documentation of the accounting period in which the payment in question is included.

3 Interest calculation rules

Applicable rate of interest is defined in § 12, Interest Act. Refund interest rate is this rate, officially quoted for the six-month period preceding every calendar year, minus two percentage points. However, the provisions of §40 and §43 of the Act on Assessment Procedure have set out the minimum applicable rate as 0.5%.

The Court ruling cited above included no comment on the start date of the interest period.

When the Tax Administration pays interest on refunds of tax prepayments to Finnish-resident corporate taxpayers, the interest added to them under §41, Act on Assessment Procedure is calculated with a start date set at the next day that follows the taxpayer's deadline date for filing its income tax return.  Correspondingly, when the Tax Administration pays interest to an individual who is a Finnish resident, the refund earns interest under §44, Act on Assessment Procedure, starting 1 February of the year following the tax year.

This way, under §77, Act on Assessment Procedure, the above dates serve as the start dates of the interest periods relating to adjustments of a corporate or individual taxpayer's taxes, and the period end date is the date when the refund is paid.

Corporate taxpayers must file their income tax returns within four months from the end of their accounting period. If two accounting periods have ended during a single calendar year, the start date of an interest period is the day after the deadline date of income tax return filing for the accounting period that ended last.

Under the Supreme Administrative Court ruling, nonresident beneficiaries of refunds must be treated the same as Finnish residents from the perspective of interest calculations. For this reason, the Tax Administration pays interest on a refunded tax at source in light of the provisions of § 41, § 44 and § 77, Act on Assessment Procedure, with the interest period starting the next day that follows the taxpayer's deadline date for filing its income tax return, and if the beneficiary is an individual, with the start date being February 1 of the year after the tax year. Calculation of interest ends on the date of payment.

Calculations are performed separately for each tax year.  For information on earlier years' rates, see the previous versions of the guidance on interest rates: Peruskorko ja viitekorko ovat pysyneet ennallaan

*) The Tax Administration additionally pays interest for a period starting on the date of the decision and ending on the date of the actual payment transaction. Interest is then calculated on the refund of tax withheld and also on the unpaid interest.