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

This is an unofficial translation. The official instruction is drafted in Finnish (Ennakonpidätys Suomessa yleisesti verovelvollisen hallintarekisteröidylle osakkeelle maksetusta osingosta, record number VH2190/00.01.00/2023) and Swedish (Förskottsinnehållning på dividend på en förvaltarregistrerad aktie till en i Finland allmänt skattskyldig, record number VH2190/00.01.00/2023) languages.

According to section 4a of the Act on Tax Prepayments (Ennakkoperintälaki 1118/1996) 50% tax must be withheld on any dividends paid in situations where the payor is aware that the shareholder is a Finnish resident taxpayer, the payor has been unable to receive required information to identify the dividend beneficiary, and the shares are nominee-registered. The purpose of this guidance is to instruct payors on what to do if information on the dividend beneficiary is unavailable to them at the time when tax should be withheld on dividends, or the identifying information of the dividend beneficiary will not be provided to the Finnish Tax Administration on an annual information return.

Clarifications and technical changes have been made to the guidance.

Authorised Intermediary's responsibilities and liabilities are discussed in the guidance Authorised Intermediary's responsibilities and liabilities.

1 Introduction

This guidance discusses the circumstances where the payor is obligated to withhold 50% withholding tax on dividends paid on nominee-registered shares, in accordance with section 4a of the Act on Tax Prepayments when the payor does not receive identity information on the dividend beneficiary who is a Finnish resident taxpayer. The general rule is that the payor must withhold tax on dividend paid to a resident taxpayer 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 Finnish Tax Administration, even if the dividends are paid on nominee-registered shares. The purpose is that the taxation of an individual taxpayer is carried out as it should, and that payors can avoid unnecessary withholding at the 50% rate.

The majority of beneficiaries that receive dividends based on nominee-registered shares are nonresident taxpayers, in cases where the shares have been issued in the Finnish Central Securities Depositary. The Act on the Taxation of Non-residents’ Income (Laki rajoitetusti verovelvollisen tulon verottamisesta 627/1978) is applied to nonresident dividend beneficiaries.

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 chapter 4, section 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, account operators are investment service firms and credit institutions.

Central Securities Depositories keep issuer-specific registers of shareholders on behalf of the corporate entities that issue shares (i.e. publicly 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 on the agent acting on behalf of the dividend beneficiary and a written statement 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 (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 (hereinafter CSD) 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 legislation on the basis of which the company and its shares were incorporated.

Under section 5a, subsection 1 of the Act on Book-Entry Accounts (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.

Shares held by Finnish shareholders kept on a book-entry account in the Finnish CSD system and issued by Finnish issuers, can only be recorded in the investor's own name. 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.

Taking into account the provisions of the domestic legislation, 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 natural person, corporate entity or foundation. This means that securities, managed by an intermediary on behalf of a Finnish natural person, 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 resident taxpayer

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

Under the provisions of section 9 of the Act on Tax Prepayments, distributing companies must withhold tax on dividends paid to Finnish resident taxpayers, unless a specific rule requires that no withholding on the dividends should be carried out. According to the provision of section 15, subsection 1, paragraph 3 on the Decree on Tax Prepayments 25,5% tax must be withheld on dividend paid to a natural person or an estate of a deceased person if the distributing company is publicly listed. No withholding is carried out on dividends paid to corporate entities under section 1, subsection 1 of the Finnish Tax Administration's decision on relief from the obligation to withhold taxes (Verohallinnon päätös ennakonpidätysvelvollisuudesta vapauttamisesta, VH/6061/00.01.00/2022).

After the payor has verified that the dividend beneficiary is a resident taxpayer and submits on annual information return the identity information on the beneficiary to the Finnish Tax Administration, the taxes withheld from the dividend are taken into account for beneficiary’s annual income taxation based on the submitted annual information return.

For more information, see Tax to be withheld on dividends and 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 corporations 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

There is a derogation from the above-described main procedure in situations where the payor cannot obtain the identity information of a dividend beneficiary who is a resident taxpayer. According to section 4a of the Act on Tax Prepayments, if the payor does not receive the information referred to in section 15e of the Act on Assessment Procedure (Laki verotusmenettelystä 1558/1995), the payor is obligated to withhold 50% withholding tax on the dividend if the dividend beneficiary is a resident taxpayer.

The information on the dividend beneficiary refers to the identifying information of the dividend beneficiary in accordance with section 15, subsection 1 and section 15e, subsection 2 of the Act on Assessment Procedure along with section 40, subsection 2 of the Finnish Tax Administration’s decision on the general requirement to report information (Verohallinnon päätös yleisestä tiedonantovelvollisuudesta, VH/5385/00.01.00/2022) that the dividend payor must report in its annual information return. The identifying information specified in the decision on the general requirement to report information are the dividend beneficiary’s name, personal identity code or Business ID, the gross amount of dividends received by the beneficiary, tax withheld on the dividend and the quantity of shares held by the beneficiary. If the dividend beneficiary has been identified as a resident taxpayer but the payor does not have the above information – and no other means are available for acquiring the above information on the beneficiary’s identity for the annual information return – the payor must withhold 50% withholding tax on the dividends.

3.3 Identifying a resident dividend beneficiary

The dividend payor must know whether the owner of nominee-registered shares is a resident or nonresident taxpayer. In other words, the payor must identify whether the income of the dividend beneficiary is taxed according to the Act on the Taxation of Nonresidents’ Income or the Act on Tax Prepayments. No importance is attached to the provisions of a tax treaty when determining whether the dividend beneficiary is a resident taxpayer. Read more about tax residency and nonresidency in the Finnish Tax Administration’s guidance Tax residency, nonresidency and residency in accordance with a tax treaty – natural persons and Resident and nonresident tax liability of corporate entities.

Whether income taxes are assessed under the rules of the Act on the Taxation of Nonresidents’ Income, or the Act on Tax Prepayments, has an impact on how the tax is withheld, as well as on how the beneficiary information is reported to the Finnish 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 a nonresident taxpayer.

The dividend payor is responsible for reporting information on dividend paid to resident taxpayers and liable for taxes left unwithheld also in situations where the ownership is nominee-registered. Payors may use service providers such as an Authorised Intermediary registered in the Finnish Tax Administration’s register of Authorised Intermediaries in investigating and identifying the dividend beneficiary. The tax liability and the responsibility to report information to the Finnish Tax Administration is nevertheless always with the payor. An Authorised Intermediary can assume responsibility for taxes and for reporting information only for dividends that are paid to nonresident taxpayers. An Authorised Intermediary cannot assume responsibility or report on its annual information return dividend paid to resident taxpayer; instead, it must provide the payor with information on dividend beneficiaries who are resident taxpayers.

An example of circumstances referred to in section 4a of the Act on Tax Prepayments is a situation where the payor does not receive information on the beneficiary from the custody chain, and therefore cannot submit the information to the Finnish Tax Administration. The payor is unable to get this information, for example, when the legislation applicable to a foreign intermediary requires an authorisation from the dividend beneficiary to provide the information to the Finnish Tax Administration and the intermediary has not received the authorisation from the beneficiary or the beneficiary prohibits the disclosure of its information to the Finnish Tax Administration. If the intermediary is aware that the beneficiary is a resident taxpayer in Finland, it must notify the payor that 50% of the dividend must be withheld in taxes regardless of the beneficiary’s legal form. The tax must be withheld at the 50% rate also when the required information is not provided to the Finnish Tax Administration for some other reason.

If an intermediary has taken reasonable measures to determine the dividend beneficiary’s country of residence in accordance with section 10b of the Act on the Taxation of Nonresidents’ Income and found that the dividend beneficiary’s country of residence is Finland, a withholding tax must be withheld from the payment. If based on an investigation it is found that the country of residence is not Finland, a tax at source is withheld on the dividend. According to section 10b of the Act on the Taxation of Nonresidents’ Income, the following can be deemed as reasonable measure to determine the dividend beneficiary’s country of residence: a tax-at-source card, a certificate of residence or an Investor Self-Declaration. More information of the Investor-Self Declaration (ISD) in the guidance The contents, period of validity and verifying the reliability of the Investor Self-Declaration.

In practice, the dividend beneficiary can also be identified by the domestic or foreign intermediary investigating the beneficiary according to the legislation of its country, including FATCA/CRS/DAC2 reporting requirements, to find out the identity and residence for tax purposes of the beneficiary. In addition, the intermediary has to consider the purpose of the use of the information and also request consent from its customer to disclose the information to the tax administration of the source country. 

When identifying the beneficiary, the intermediary can utilize the identification and investigation procedure required for international exchange of information (governed by the FATCA/CRS/DAC2 rules) including the latest 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 the beneficiary is identified as a resident taxpayer or an account holder whose information must otherwise be reported to Finnish authorities, and the required information on the beneficiary is not delivered to the Finnish Tax Administration, the payor must withhold 50% tax on the dividends. Corporate entities must be treated as being resident taxpayers if Finland is the country of their corporate registration. When identifying the dividend beneficiary, 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 well, since as a result, such a beneficiary can be treated as a nonresident taxpayer. The Finnish Tax Administration may request additional information from the payor, who in turn, if necessary, may ask the intermediary who is acting on its behalf for the details on the procedure used to identify the dividend beneficiary.

It is common practice for intermediaries 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 owned by resident taxpayers are held there. This means that any resident taxpayers among the shareholders of shares recorded in the omnibus account must be specified for taxation purposes at the time when dividends are distributed and this must be done so that the payor may know whether the 50% rate of withholding must be applied on the dividend.

4 Tax returns and making payments

The dividend payor must report the amount of tax withheld on the dividends on the tax return on self-assessed taxes. 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 verojen 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 Annual information returns

Under section 15, subsection 1 and section 15e, subsection 2 of the Act on Assessment Procedure and section 40 of the Finnish Tax Administration's decision on the general requirement to report information, a company that has distributed dividend must submit an annual information return containing the identifying information of the dividend beneficiary.

When the dividend is paid to a nominee-registered share and the payor does not receive or cannot provide the Finnish Tax Administration with the information necessary for the tax assessment of a resident beneficiary, the payor must report the dividends on the annual information return on dividends in accordance with the procedure described in the filling instructions of the return. In this case, the intermediary closest to the beneficiary that the payor is aware of is reported instead of the dividend beneficiary.

6 Correcting tax withholding

If tax at source is withheld on the dividend but the payor becomes aware later during the payment year that the dividend beneficiary was a resident taxpayer at the time of payment the payor must correct any tax that has been incorrectly withheld and reported. A correction must also be made when a withholding tax has been withheld on the dividend, but later during the year of payment the payor receives information that the dividend beneficiary was a nonresident taxpayer at the time of payment (section 10 and section 18 of the Act on the Taxation of Non-residents’ Income).

Payors can correct taxes incorrectly withheld with the 50% rate to be withheld with a lower rate during the payment year. The correction can be made only when the payor receives the identity information on the dividend beneficiary before the end of the payment year.

If the payor is unable to provide information to the Finnish Tax Administration on the resident dividend beneficiary and consequently, the payor cannot correct the withheld amount during the payment year, the resident beneficiary can request the excessive withholding to be taken into account in the beneficiary's annual income taxation after the payment year of the dividend (section 34 of the Act on Assessment Procedure).

If tax at source has been incorrectly withheld for a dividend beneficiary who is a Finnish resident taxpayer, the amount that was withheld incorrectly can be considered to the taxpayer’s benefit in their annual income taxation. 

If withholding tax has incorrectly been withheld from dividend paid to a nonresident taxpayer, the nonresident taxpayer can after the payment year apply for a refund of the tax from the Finnish Tax Administration with the tax at source refund application.

7 Neglected obligations of the dividend payor

The company that pays dividend is responsible for withholding the correct amount of withholding tax. If an amount of tax withheld and reported is too low, the Finnish Tax Administration will impose the missing difference on the payor pursuant to the provisions of section 40 of the Act on Assessment Procedure of Self-Assessed Taxes. The Finnish Tax Administration will also impose a punitive tax increase and late-payment sanctions on the dividend payor.

If a company that has distributed dividend fails to submit an annual information return on dividends, submits it past the deadline, or submits it as incomplete or erroneous, the Finnish Tax Administration can impose a negligence penalty pursuant to section 22a of the Act on Assessment Procedure.