How to withhold tax on dividends paid to a Finnish tax resident shareholder when the underlying shares are nominee-registered

Date of issue
1/24/2020
Record no.
VH/4329/00.01.00/2019
Validity
1/1/2020 - Until further notice
Authorization directive
Act on the Tax Administration (503/2010), section 2(2)
Replaces guidance
Dnro A18/200/2016, 25.4.2016

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

Changes were made in April 2019 to the provisions of the Prepayment Act (ennakkoperintälaki 1118/1996) and a new provision, section 4 a, was added. Under the newly enacted § 4 a, starting 1 January 2020, 50% preliminary withholding must be withheld on any dividends paid in situations where the payor is aware that the shareholder is a Finnish tax resident, the payor has been unable to receive required information to identify the dividend beneficiary, and the shares are nominee-registered. The present guidance informs payers on what to do if information on the dividend beneficiary of the dividends is unavailable to the payor at the time when tax should be withheld on dividends, and on what to do if the identity information is not provided to the Tax Administration on an annual information return.

Tax Administration will update the guidance due to changes in regulations regarding dividends paid to nominee-registered shares which will first be applied to dividends paid on 1 January 2021 or thereafter.

This guidance replaces the previous guidance dated 25 April 2016 "On the tax treatment of domestic shareholding" – Hallintarekisteröidyn kotimaisen osakeomistuksen verotusmenettelystä (record no A18/200/2016, only available in Finnish and Swedish).

Explanatory note for the English version

This guidance is targeted at the payor of the income (issuer), but can also be utilised by parties to which the payor has outsourced its responsibility of identifying beneficiaries. This guidance will be updated regarding the upcoming regulations that come into force in 2021. The Tax Administration will publish guidance on withholding tax on dividends paid to nominee-registered shares held by nonresidents later this year. For more information, see Legislative change: nominee-registered shares.

1 Introduction

This guidance discusses the circumstances where the payor must withhold 50% on dividends paid on shares recorded in nominee accounts, in reference to the provisions of § 4 a of the Prepayment Act if the payor does not receive identity information on the dividend beneficiary in the case of a Finnish resident taxpayer who receives dividends. The general rule is that the payor must identify the beneficiaries of dividends and recognize those who are Finnish tax residents and withhold taxes as required by the Decree on Tax Prepayments (Ennakkoperintäasetus 1124/1996) and report the identity information on the dividend beneficiary, as it is in the payor’s disposal, to the Tax Administration, even if the dividends are paid on nominee-registered shares. The objective is that the assessment of an individual taxpayer is carried out as it should, and that payors can avoid unnecessary withholding at the 50-percent rate.

The vast majority of beneficiaries that receive dividends based on nominee-registered shares are nonresidents, when the shares have been issued by a Finnish Central Securities Depositary. The applicable legislation to nonresident dividend beneficiaries is the Act on the Taxation of Nonresidents' Income (Laki rajoitetusti verovelvollisen tulon verottamisesta 627/1978).

2 Holdings of shares in nominee accounts

The legal provisions on the Book-Entry system and on holdings that can be recorded in nominee accounts are found in § 4 of Chapter 4 of the Act on the Book-Entry System and Settlement Activities (Laki arvo-osuusjärjestelmästä ja selvitystoiminnasta 348/2017). To have holdings of shares on a nominee account means that instead of entering the dividend beneficiary’s name in the Book-Entry system, the share is recorded as being held by an intermediary, a “nominee”. The intermediary in charge of nominee registration may be the operator of the Book-Entry account, the central bank or the Central Securities Depository itself. Generally, investment service firms and credit institutions are account operators.

Central Securities Depositories keep issuer-specific registers of shareholders on behalf of the corporate entities that issue shares (mostly stock-exchange-listed companies). In order to identify the dividend beneficiaries of the nominee-registered shares, the intermediary in charge of nominee registration must give, upon request, to the Financial Supervisory Authority the name of the dividend beneficiary, if known, as well as information on how many book-entry shares the dividend beneficiary holds. If the name of the - dividend beneficiary of book-entry shares remains unknown, the intermediary in charge of nominee registration must deliver identity information to the Tax Administration on the agent acting on behalf of the dividend beneficiary. In addition, a written statement must be delivered that affirms that the actual shareholder is not a Finnish natural person, corporate entity, or foundation. On request, the above information must also be given to the company concerned i.e. the payor. In order to keep up its tax control activity, the Tax Administration can ask the issuer of the securities to give details on the dividend beneficiary of book-entry shares.

The European Regulation on central depositories of securities (CSD), 909/2014/EU, is applied in case a Finnish company issues its shares in another EU country, in other words, engages the services of a Central Securities Depository outside of Finland. What is meant by a Finnish central depository is a Finnish limited-liability company that has received a license to operate as a CSD within the meaning of the Act on the Book-Entry System and Settlement Activities. Even if a Finnish company were the client of a central securities depository outside of Finland, the shares it has issued are still governed by Finnish corporate law on the basis of which the company and its shares were incorporated.

Shares held by Finnish citizen, and issued by Finnish issuers, can only be kept on a book-entry account in the Finnish CSD system. For this reason, national legislation does not make it possible to have shares nominee-registered in a Finnish CSD in situations where the shareholder is a Finnish citizen, a Finnish corporate entity, or a Finnish foundation.

Under § 5 a (1) of the Act on the Book-Entry System and Settlement Activities (Laki arvo-osuustileistä 827/1991), only the kind of book-entry shares can be recorded in a client account, for which the account operator has received a contract on asset management, and where the shares belong to a foreign citizen, a foreign corporate entity, or a foreign foundation. Nominee-registration is only allowed for shares traded in a market (place) as referred to by Chapter 1, section 2, subsection 1.13 of the Act on Trading in Financial Instruments (Laki kaupankäynnistä rahoitusvälineillä 1070/2017). From the perspective of the Finnish rules on nominee-registered holdings, the marketplace where the corporate shares of a Finnish company are traded does not impact the applicable rules and regulations.

Taking into account the provisions of the Finnish rules, it is also permissible to enter the book-entry shares in a foreign CSD's account in situations when the shareholder-client is a Finnish citizen (a natural person), a Finnish corporate entity or a Finnish foundation. This means that securities, managed by an intermediary on behalf of a Finnish citizen, corporate entity or foundation, may be recorded on a nominee basis if the securities have been issued in a Central Securities Depository in a foreign country and the applicable legislation governing the foreign CSD allows nominee registration of Finnish shares. In spite of the fact that the shares of a Finnish company have been issued in a foreign CSD, the Finnish company must abide by the rules set out by Finnish tax legislation concerning the obligations prescribed to a dividend payor.

3 How taxes should be withheld on dividends paid to a Finnish tax resident

3.1 How to withhold tax on dividends paid to a Finnish tax resident beneficiary with full disclosure of identity

Under the provisions of § 9 of the Prepayment Act, distributing companies must withhold tax on dividends paid to Finnish tax residents, unless a specific rule requires that no withholding on the paid-out dividends should be carried out. According to the provision of § 15 (1), line 3 on the Decree on tax Prepayments 25.5% tax must be withheld on dividends (this rule is in force for 2020) paid to natural persons and estates of deceased persons if the distributing company is publicly listed. No withholding is carried out on dividends paid to corporate entities under section 1(1) of the official decision of the Tax Administration on relief from the obligation to withhold taxes (Verohallinnon päätös ennakonpidätysvelvollisuudesta vapauttamisesta).

Based on the amounts reported by the payor on the submitted annual information return for the tax year, the amount withheld from the dividend payment will be credited in the assessment of the beneficiary's annual income taxation. This requires that the payor has made certain that the dividend beneficiary is a Finnish resident taxpayer, and the payor will submit an annual information return to the Tax Administration containing the beneficiary’s identity information also in cases where the share held by the Finnish resident taxpayer is recorded in a nominee account.

For more information, see “Tax to be withheld on paid-out dividends, guidance for reporting” – Ennakonpidätys osingosta ja Verohallinnolle annettavat ilmoitukset (only available in Finnish and Swedish).

For more information on the tax treatment of natural persons and corporate entities that receive dividends, see “Taxation of dividends” – Osinkotulojen verotus (only available in Finnish and Swedish).

3.2 How to withhold tax on dividends when identity information on the dividend beneficiary is not available

Derogation from the above procedure is necessary in situations where the payor cannot obtain the identity information of the Finnish tax resident beneficiary of dividends. Under § 4 a, Prepayment Act, if the payor does not receive the information referred to in § 15 e, Act on assessment procedure, the payor must withhold 50 percent preliminary withholding tax on the amount of the dividends if the dividend beneficiary is a Finnish tax resident.

In 2020, the concept of “information on the dividend beneficiary of dividends” will mean the information within the meaning of § 15, Act on Assessment Procedure, and within the meaning of Chapter 3, section 22 of the Tax Administration’s official decision on the general requirement to report information to the tax authority (Verohallinnon päätös yleisestä tiedonantovelvollisuudesta). The “identity information” within the meaning of the official decision are the dividend beneficiary’s name, personal identity code or Business ID, the gross amount of dividends received by the beneficiary, tax withheld on it, and the quantity of shares held by the beneficiary. If it has been established that the dividend beneficiary is a Finnish resident but the payor does not know the above information – and no other means is available of receiving the above information on the beneficiary’s identity for the annual return to be submitted to the Tax Administration – the payor must withhold 50% preliminary withholding tax on the dividends. As of 1 January 2021, the concept of “information on the dividend beneficiary” will mean the information within the meaning of § 15 e, Act on Assessment Procedure, as it will come into force on that date.

3.3 To identify a dividend beneficiary — a Finnish resident taxpayer

The party that pays out dividends must obtain the required information about the dividend beneficiary. This means that the payor must be aware of the shareholder’s tax status – resident or non-resident regardless of the nominee registration. In other words, payor must identify whether the income of the dividend beneficiary of the dividends on nominee-registered shares is taxed as provided in the Act on the Taxation of Nonresidents' Income or as provided in the Prepayment Act. No importance is attached to the provisions of a tax treaty when determining whether the dividend beneficiary is a Finnish tax resident.

Read more about resident and nonresident tax liability in the Tax Administration’s Tax residency and nonresidency guidance.

Whether income taxes are assessed under the rules of the Act on the Taxation of Nonresidents' Income, or those of the Prepayment Act, has an impact on how the tax is withheld, as well as on how the beneficiary information is reported to the Tax Administration. If the payor does not have identity information on the beneficiaries, the payor must at least have information on whether dividends were paid to a resident or to a nonresident.

Payors are entitled to delegate their responsibility to obtain information on beneficiaries to the custodian nearest to the dividend beneficiary. This custodian will then follow the agreed procedure in the custody chain and deliver the identity information to the payor. Finnish tax legislation states that the payor is liable for the taxation and for giving the information to the Tax Administration.

An example of circumstances referred to in § 4 of Prepayment Act is a situation where the payor cannot receive information on the beneficiary from the custody chain, and as a result, remains unable to give the required information to the Tax Administration. The payor is unable to get this information when a foreign custodian has not received the beneficiary’s consent, and the beneficiary has stated that their information must not be passed on to the Finnish Tax Administration. Payors must withhold tax at the 50-percent rate even if there is some other reason why the required information is not provided to the Tax Administration.

In circumstances within the meaning of § 4 a, Prepayment Act, 50 percent must be withheld on paid-out dividends regardless of the legal entity form of the dividend beneficiary. For example, the amount withheld must be 50 percent when the beneficiary of dividends is a limited liability company or some other corporate entity, resident in Finland, but the payor of dividends is unable to pass on the beneficiary’s identity information to the Tax Administration.

An example of a practical approach to clearing up a beneficiary's identity is that the domestic or foreign custodian applies the provisions of the national legislation of their own country, including FATCA, CRS and DAC2 reporting standards, for finding out the beneficiary’s identity, country of tax residence, and having informed their client of the purpose of use of the information, requests the client's consent to deliver the information to the source country of the dividends, i.e. to the tax authorities of that country.

When the dividend beneficiary of dividends is a Finnish tax resident, as referred to in § 4 a of the Prepayment Act, the payor can utilise the custodian nearest to the beneficiary to help identify the beneficiary. The custodian can identify the facts and examine clients in the same way as it has been required for international exchange of information (governed by the FATCA/CRS/DAC2 rules) including information collected pursuant to Anti-Money Laundering and Know Your Customer – AML and KYC – Procedures. If the beneficiary’s identity has already been established for any of the purposes mentioned above, and if the beneficiary is a Finnish tax resident or an account holder whose information must otherwise be reported to Finnish authorities, and in spite of this the required information on the beneficiary is not delivered to the Tax Administration, the payor must withhold 50% on the dividends. Corporate entities must be treated as being Finnish tax residents if Finland is the country of their corporate registration. When examining who the beneficiary of dividends is, also the fact that the beneficiary is an account holder whose information does not have to be reported to Finnish authorities is worthwhile information: as a result, such a beneficiary can be treated as a nonresident. The Tax Administration may send a request for additional information to the payor, who in turn may ask to get the necessary details on the procedure used to identify the dividend beneficiary from the custodian that handled the account.

It is common practice for custodians to hold the shares held by their nominee-account clients on one single account (also known as an omnibus account). In this case, the payor must have information on the existence of the omnibus account and on whether any shares held by Finnish tax residents are held there. This means that any Finnish residents among the shareholders of shares recorded in the omnibus account must be specified at the time when dividends are paid out for taxation purposes; this must be done so that the payor may know whether the 50-percent rate of withholding must be applied on any of the dividend payments.

Example 1:

The payor of dividends receives information from the custodian in the custody chain that has to review and identify dividend beneficiary “A” for the purpose of international exchange of information, and concluded that "A" is a non-resident. In the process of identifying dividend beneficiary "A", the custodian has made use of the information collected for FATCA/CRS/DAC2 reporting, and on the basis of which the custodian has been able to verify that "A" is not an account holder who must be reported to the Finnish tax authorities. In this case, the payor can rely on the information received from the custody chain and withhold 30 percent as tax at source on the paid-out dividends in accordance with § 7(4) of the Act on the Taxation of Nonresidents' Income.

Example 2:

The payor of dividends receives information from the custodian, who has reviewed and identified dividend beneficiary “B” for the purpose of international exchange of information, and concluded that "B" is a Finnish tax resident. The custodian cannot pass the beneficiary’s identifying information on to the payor because the beneficiary has denied permission to do so. The payor does not have the identity information of the beneficiary of dividends – for this reason, the payor must withhold 50 percent.

Example 3:

After the year of payment in the process of tax control, the Tax Administration requests the payor of the income for a detailed account on its procedure regarding how the payor has verified at the time of payment that a dividend beneficiary unknown to the payor is not a Finnish tax resident. The payor provides a response stating that either the payor itself, or a custodian acting on its behalf, has informed the custodians in the custody chain of the application of § 4a of the Prepayment Act and related guidance issued by the Tax Administration. Simultaneously the chain has been informed, that Finnish citizens and Finnish companies cannot hold their Finnish shares in a nominee-registered account.

The payor has also agreed with the custodians, that the custodians go through their nominee-registered accounts at the time of payment to make sure that the accounts do not hold Finnish tax resident shareholders. The detailed account includes a confirmation from the custodian, that the custodian itself or the custodian in the custody chain closest to the beneficiary has checked their nominee-registered accounts according to the procedures described in the Tax Administration's official guidance, and on the basis of which they have found there to be no Finnish tax residents among the dividend beneficiaries.

The aforementioned procedure is found acceptable to show that the payor has to the best of its abilities identified that the dividend beneficiary is not a Finnish tax resident.

4 Completing the tax return, making payments

Payors must submit the tax return on self-assessed taxes with information on how much tax was withheld on the dividends. The legal rules on the tax return on self-assessed taxes are found in Chapter 4 of the Act on Assessment Procedure of Self-assessed Taxes (Laki oma-aloitteisten veron verotusmenettelystä 768/2016). The self-assessed tax return must be filed electronically, at intervals according to the payor’s tax period. Self-assessed taxes are paid using the bank reference number for self-assessed taxes.

Read more about filing and paying self-assessed taxes:
Filing and paying self-assessed taxes

5 Completing the annual information return

Under § 15(1) of the Act on Assessment Procedure and the official decision of the Tax Administration on the general requirement to report information, dividend-distributing companies must submit an annual information returns that contains the identifying information of the dividend beneficiaries. When the beneficiary of dividends is a “nominee” on a nominee account and when the payor cannot receive information – or has been unable to deliver information to the Tax Administration – necessary for the tax assessment of a Finnish resident taxpayer, the payor has been under the obligation to withhold 50% on the dividends. In this case, the payor must classify the paid-out dividends as “07” type of payment on the annual information return on dividends: Paid dividends on a nominee-registered share, held by a Finnish resident taxpayer, beneficiary not known.

For more information, see:

The official decision of the Tax Administration on requirement to report information – Verohallinnon päätös yleisestä tiedonantovelvollisuudesta (only available in Finnish and Swedish)

How to report annual information
Instructions for annual information return on dividends, reporting year 2020 (only available in Finnish and Swedish)

6 Making corrections to the amount withheld

If it turns out that the amount of withholding on dividends was incorrect, the payor must adjust it later during the year of payment. The payor can make an adjustment of this kind in a situation where a payment to the beneficiary has been made, tax at source has been withheld, but later during the year of payment, information is received that the beneficiary was a Finnish resident taxpayer at the time of payment. Another situation where the payor should make the adjustment would be when a payment to the beneficiary has been made, preliminary withholding has been carried out, but later during the year of payment, information is received that the beneficiary was a non-resident taxpayer at the time of payment (§ 10 and § 18, act on the taxation of nonresidents' income).

If the payor has withheld 50 percent preliminary withholding tax and it is found out later that it was excessive, the payor must adjust it to a smaller amount during the year of payment (under §19, Prepayment Act). The payor can only make the adjustment provided that the beneficiary discloses their full information before the end of the year of payment.

More information on how to make corrections to taxes withheld when the amount has been too high: “Information on withholding” – Ennakonpidätyksen toimittaminen.

If the payor is unable to provide information to the Tax Administration on the Finnish tax resident dividend beneficiary and consequently, the payor does not perform an adjustment of the withheld amount, the Finnish tax resident beneficiary can make a demand that the excessive withholding will be accounted for during a subsequent year after the year when the beneficiary received the dividends. If an incorrect withholding has been carried out (ennakonpidätys; förskottsinnehållning) on dividends paid to a non-resident, the nonresident can apply for a refund from the Tax Administration by using the application for refund of Finnish withholding tax on dividends.

If the beneficiary is a resident but the payor has erroneously withheld tax at source (lähdevero, källskatt), the amount that was withheld incorrectly will be credited to the beneficiary when the assessment of the beneficiary's taxes is carried out for the year.

Example 4:

The payor of dividends withholds 50% (ennakonpidätys, förskottsinnehållning) when paying to a beneficiary who is a Finnish resident taxpayer because the payor does not have the identity information on the beneficiary. However, after a month, the custody chain provides the necessary information. The beneficiary is a natural person. For this reason, the payor performs an adjustment of the withheld tax and withholds 25.5% of tax on the dividends as provided in § 15 of the decree on tax prepayments (Ennakkoperintäasetus 1124/1996) and ensures that the beneficiary receives a document proving that the withholding is correct, as provided in § 35 of the Prepayment Act. The payor submits an annual information return to provide the identity information on the beneficiary to the Tax Administration.

Example 5:

The payor has withheld 30% tax at source (lähdevero, källskatt) when paying dividends to a beneficiary. After payment, the custody chain informs the payor that the beneficiary is a Finnish tax resident. No identity information of the dividend beneficiary is made available to the payor, which means that 50% should have been withheld on the dividends. In this case, the payor must submit an annual information return on paid-out dividends and report this payment as an amount paid to a Finnish tax resident.

If the payor succeeds in collecting the difference in withholding from the beneficiary, the payor can pay it on to the Tax Administration. If the payor does not, on the payor’s initiative, make the necessary correction to the low amount withheld, the Tax Administration will demand that the payor must pay up the difference.

7 Neglected obligations of payors of dividends

Under the provisions of the Act on Assessment Procedure of Self-assessed Taxes, the company that distributed dividends is accountable for ensuring that the amounts withheld are correct, in light of the basis for tax assessment to be applied on the beneficiary of the dividends. If an amount was withheld and reported that is too low, the Tax Administration will impose the missing difference on the distributing company, under the provisions of § 40 of the Act on Assessment Procedure of Self-Assessed Taxes. The Tax Administration will also impose a tax penalty and late-payment charges on the distributing company.

If the distributing company fails to submit an annual information return on the paid-out dividends, submits it past the deadline, or submits it as incomplete, the Tax Administration can impose a negligence penalty as referred to in § 22 a of the Act on Assessment Procedure.

Kalle Hirvonen
Head Tax Adviser

Satu Pentikäinen
Tax Specialist