Taxation of dividends received by foreign entities offering statutory pension insurance

This is an unofficial translation. The official instruction is drafted in Finnish (Lakisääteisiä eläkkeitä tarjoavien ulkomaisten eläkelaitosten osinkojen lähdeverotus, record number VH/2466/00.01.00/2025) and Swedish (Källbeskattning av dividender för utländska pensionsanstalter som tillhandahåller lagstadgade pensioner, record number VH/2466/00.01.00/2025) languages.

This guidance discusses the provisions concerning pension insurance institutions in § 3 and § 7 of the Act on the Taxation of Nonresidents' Income (627/1978) under which foreign pension insurance institutions that are comparable with Finnish ones may receive an exemption. Subject to certain restrictions, the exemption defined in § 8, subsection 1.10 of Business Tax Act (306/1968) is available. This guidance describes the accounts and documentation to be prepared by a foreign pension insurance company for this purpose.

The guidance has been updated due to amendments to § 8, subsection 1.10 of Business Tax Act. In addition, other minor updates have been made.

1 Introduction

Domestic pension institution can be established in various legal forms, such as a pension insurance company or a pension fund. For tax purposes, pension institutions are considered corporate entities as defined in § 3 of the Income Tax Act (1539/1992). Pension institutions are not exempted from income taxation under law. This means that their taxable income from business profits is computed as provided in the Business Tax Act . The expenses that are deductible are subtracted from the total income from business profits, not as specific expenses that would be deductible from certain categories of income.

Under § 8, subsection 1.10, Business Tax Act, it is permissible for insurance companies to deduct their statutory transfers to the reimbursement and  insurance-liability reserves of their balance sheet. Similarly, Finnish pension funds, supplementary pension funds, employees´ pension associations, supplementary employees´ pension associations and other comparable pension institutions may deduct the expenses, calculated by actuarial principles, necessary for the coverage of their liability to pay out pension benefits and other similar liabilities as agreed.  Under the provisions of the legal act, the rights to this deduction are applicable to all kinds of insurance activities. The purpose of the deductibility of the expenses is to help safeguard the payments of pension benefits in the future. Further provisions on this deduction regarding the periodization of the deduction are found in § 48, Business Tax Act.

On 1 January 2015, amendments came into force to the Act on the Taxation of Nonresidents' Income making domestic rules compliant with EU law (in reference to ruling C-342/10) by extending the deduction rights of § 8, subsection 1.10, Business Tax Act, to foreign pension insurance institutions. Subject to certain restrictions, the deductibility is related to situations where a pension institution is a beneficiary of dividends from a Finnish source.

2 Amount of tax at source; expenses deductible under the Business Tax Act

The payer must withhold tax at source when dividend subject to tax at source is paid to a relevant taxpayer or credited for them in an account. Under § 7, subparagraph 3, Act on the Taxation of Nonresidents' Income, the tax rate is 15% of the dividend when the shares held by the beneficiary are their investment assets, if the beneficiary is a foreign corporate entity comparable to a domestic pension insurance company. The foreign corporate entity's residency must be in the European Economic Area and the entity cannot be a corporation referred to in the Parent-Subsidiary Directive which would own at least 10% of the share capital of the dividend-distributing company.

The 15% rate of taxation at source is also applicable to foreign pension institutions comparable with domestic ones whose residency is outside the European Economic Area on the condition that they do not own more than 10% of the share capital of the dividend-distributing company. A further precondition is that Finland and the beneficiary's country of tax residence must have a mutual convention on assistance and exchange of information on tax matters, and sufficient details for the assessment of taxes can be received.

A tax agreement signed between the country of residence and Finland may, however, have an impact on the amount of tax at source to be withheld.

Under § 3, subsection 7, Act on the Taxation of Nonresidents' Income, if dividends are paid on shares treated as investment assets by the beneficiary, a deduction is permitted, in reference to § 8, subsection 1.10, Business Tax Act, corresponding to the share of dividends received from Finland of their turnover. The right to this deduction is only granted to entities that are comparable to Finnish pension institutions.

The deduction may be granted if the foreign entity's residency is in the European Economic Area. It can also be granted to pension institutions whose residency is outside the European Economic Area on the condition that they do not own more than 10% of the share capital of the dividend-distributing company. Finland and the beneficiary's country of tax residence must have a convention on assistance and exchange of information on tax matters and sufficient details for the assessment of taxes are received. The Act requires that a beneficiary must provide the Finnish Tax Administration a calculation outlining the amount to and grounds for deduction in reference to § 8, subsection 1.10, Business Tax Act. 

When the amendment was in preparation (government proposal no 157/2014 to the Finnish Parliament), additional preconditions were listed: the foreign entity must be a non-profit entity and it cannot offer other than statutory pension insurance products, i.e. only pension insurance and additional employment-related pension coverage. Moreover, the foreign entity must be tax-exempt under the legislation of its country of residence and it must function under similar official supervision as a Finnish comparable institution or entity.

3 Granting the deduction

3.1 An account of the general circumstances

In order to qualify for the deduction under the Business Tax Act, foreign entities are required to provide the following information proving that the necessary preconditions are fulfilled:

a) The corporate entity's country of tax residence is in the European Economic Area

1. The shares on which the dividends are based on are booked as 'investment assets' on the entity´s balance sheet.
2. The entity´s only activity is to offer mandatory pension contracts and employment-related additional pension contracts. Consequently, the entity´s operations cannot include other types of pension contracts such as individual retirement accounts etc. 
3. The activities of the entity are not aimed at turning a profit.
4. The laws of the entity's country of residence provide exemption from taxation; alternatively, the entity enjoys a similar privilege as a domestic pension institution to deduct the yearly changes of its actuarial liability i.e. a de-facto exemption.
5. The entity must be under public supervision by authorities in the same way as a Finnish entity is. The system of control and supervision that monitors domestic pension institutions is made up by its own administrative body, its internal control function, its auditors and outside supervision.  In Finland the Financial Supervisory Authority is in charge of the monitoring.

b) If the corporate entity´s tax residence is located outside the European Economic Area, in addition to points 1-5 the entity is required to provide an account proving that the entity directly owns less than 10% of the dividend-distributing company's capital.

3.2 A calculation outlining the amount to be deducted

Foreign entities are required to provide a calculation of the amount to be deducted, and an account on the proportional share of the Finnish-sourced dividends of their annual turnover.   Domestic pension insurance companies are required to provide a similar calculation.

The government proposal refers to Guideline no FIVA 7/01.00./2012 of the Financial Supervision Authority, under which 'annual turnover' means the sum of: revenue in the form of received insurance premiums, not deducting any related bad debts or reinsurance expenses + net revenue from investments + other revenues.

Link to a financial statement formula for insurance companies (available in Finnish)

https://www.finlex.fi/fi/lainsaadanto/2008/614

There is a Decree of the Finnish Ministry of Social Affairs and Health laying down the formula for the profit and loss statement (P&L) for pension funds, supplementary pension funds, employees´ pension associations and supplementary employees´ pension associations (decree no 1196/2021, appendix 1). The formula is included in the guidelines issued by the Financial Supervision Authority, no 15/2012 (from p. 39 onwards, available in Finnish).

The deductible transfer of expenses is determined under actuarial principles governing coverage of the liability to pay pension benefits to the insured, and of the liability to maintain a reserve. The basis of the deductions in the case of mandatory pensions including employment pensions is laid out in the provisions of Finnish legislation on employment pensions. The additions made during the accounting period to the liability and to the reserve are deductible from business income. In the inverse situation, if the liability and the reserve decrease during an accounting period, it is treated as taxable income. The annual changes in the liability and in the reserve must be entered in the entity's accounting. The link below is to the website of the Finnish Pension Alliance (TELA ry) where a general description of the liabilities accounting is posted.

https://www.tela.fi/en/financing-of-pensions/technical-provisions/

If the entity´s country of tax residence has a similar system and the entity´s financial statements show the amount of the deduction granted by the entity´s country, it will be enough if the entity just forwards the Tax Administration the financial statements. However, the entity must additionally give the Tax Administration an account of its receipts of dividends from Finland, and report the corresponding deduction assigned to them as well.

If the entity is not liable to keep accounting records in its country under a similar system as in Finland, the entity must prepare a profit-and-loss account and balance sheet according to the provisions laid down by the Ministry of Social Affairs and Health (decree governing pension institutions, STMtpA 614/2008). Then the entity must give the Tax Administration details on the deduction assigned to the entity´s dividends under § 8, subsection 1.10 of Business Tax Act (EVL).

Please find two simplified illustrations below on how upward and downward changes in the liability will affect the deductions.

4 Entities receiving special tax treatment

Tax treaties concluded by Finland may contain special provisions regarding the withholding tax rate on dividends applicable to pension institutions resident in the other contracting state. Such provisions can be found, for example, in the tax treaties between Finland and the United States of America, Finland and the Netherlands, and Finland and Spain. The exact conditions for the reliefs specified in the tax treaties can be verified in the applicable treaty. The valid tax treaties concluded by Finland are listed in the Finnish Tax Administration’s guidance Tax treaties.

Under the Income Tax Act, some entities are exempted from taxation either partly or fully. An example of these is Keva, the municipal pension insurance institution. Keva is an independent entity under the laws governing public corporations and authorities, safeguarding the financing of municipal pensions and related investments.

Keva and similar entities are not concerned by the provisions of § 3, subparagraph 7, Act on the Taxation of Nonresidents' Income. However, taking Art. 63 of the Treaty on the Functioning of the EU with case-law into consideration, dividends paid out to a foreign entity comparable with Keva may be fully exempted from taxation.

Claims for comparability based on EU law are discussed in more detail in the Tax Administrations guidance Payments of dividends, interest and royalties to nonresidents, chapter 3.4.5.

5 Tax at source refund procedure

In practice, excess tax at source withheld is refunded upon application by the taxpayer due to the fact that a foreign entity normally cannot provide all the details required by Finnish law at the time of dividend payment or during the dividend payment year. Tax Administration pays interest on the tax being refunded as provided in § 11, subsection 4 of the Act on the Taxation of Nonresidents' Income.

The applicant must provide the Tax Administration with documentation detailing the amount of the deduction and the grounds for it. Evaluations are made on a case-by-case basis as to whether the foreign entity can be treated as being comparable to a Finnish pension insurance institution.

The tax at source rate for investment asset dividends is determined based on the tax rate in force during the relevant tax year.

Applying for a refund of the tax at source is discussed more in detail in the Tax Administrations guidance Tax at source procedure applied to a non-resident taxpayer’s income and a key employee’s wage income, chapter 3.2.