Payments of dividends, interest and royalties to nonresidents

This is an unofficial translation. The official guidance is drafted in Finnish and Swedish languages: VH/5004/00.01.00/2021.

These instructions concern taxation on dividends, interest and royalties received from Finland by nonresident natural persons and corporate entities. These instructions discuss the key provisions of the Act on Income Tax (Tuloverolaki 1535/1992) and tax treaties on dividends, interest and royalties. These instructions only concern certain parts of situations where a nonresident taxpayer or corporate entity has a permanent establishment in Finland for engaging in business activities in Finland and the aforementioned income is attributable to the permanent establishment.

More information on the withholding of tax at source on dividends, interest and royalties and the payer’s obligations related to the tax withholding is available in the Finnish Tax Administration’s instructions Withholding tax at source on dividends, interest and royalties, and the payor’s obligations.

1 Foreword

1.1 Nonresident tax liability

According to section 9, subsection 1 of the Act on Income Tax, tax liability in Finland is divided into resident and nonresident tax liability. The tax liability determines to what extent Finland can tax a taxpayer’s income.

If a natural person is not a resident of Finland, they are a nonresident taxpayer (section 9, subsection 1 of the Act on Income Tax). A natural person is considered a resident of Finland if they have their permanent residence and home here, or if they stay in Finland for a continuous period of more than six months. In addition, the three-year exception applies to Finnish citizens. On the basis of this, a Finnish citizen moving abroad usually becomes a nonresident taxpayer only from the beginning of the fourth year following the move (section 11 of the Act on Income Tax). More information on the resident and nonresident tax liability of natural persons is available in the Finnish Tax Administration’s instructions Tax residency, nonresidency and residency in accordance with a tax treaty – natural persons.

A corporate entity established or registered abroad is a nonresident taxpayer, unless its place of effective management is located in Finland (section 9, subsection 1 of the Act on Income Tax). A party in accordance with foreign legislation is regarded as a corporate entity in Finnish taxation when it is considered to be comparable to any of the corporate entities listed in section 3, paragraphs 1–7 of the Act on Income Tax. For example, companies generally deemed comparable to Finnish limited liability companies (Oy) are the Swedish aktiebolag (AB) and the Estonian osaühing (Oü). In addition, foreign death estates are also taxed as corporate entities (section 3, paragraph 6 of the Act on Income Tax). More information on the resident and nonresident tax liability of corporate entities is available in the Finnish Tax Administration’s instructions Resident and nonresident tax liability of corporate entities.

Natural persons and corporate entities that are nonresident taxpayers are only liable to pay tax in Finland on income received from Finland (section 9, subsection 1(2) of the Act on Income Tax). A list of examples of taxable income received by nonresident taxpayers in Finland is presented in section 10 of the Act on Income Tax. The list is not exhaustive, but under established tax practice, the list is considered to be exhaustive in relation to the income mentioned within said list. According to this section, income received from Finland includes dividends (section 10, paragraph 6 of the Act on Income Tax), interest (section 10, paragraph 7) and royalties (section 10, paragraph 8). As a rule, interest income received by a nonresident taxpayer in Finland is, however, tax exempt (section 9, subsection 2 of the Act on Income Tax).

If a nonresident taxpayer has a permanent establishment in Finland for engaging in business activities, the nonresident taxpayer will be liable to pay tax on all income attributable to the permanent establishment, regardless of whether the income has been received from Finland or elsewhere (section 9, subsection 3 of the Act on Income Tax). Income attributable to a permanent establishment may also involve dividends, interest and royalties received from Finland. In this case, they will be taxed similarly to a resident taxpayer’s income. More information on the formation and taxation of a permanent establishment is available in the Finnish Tax Administration’s instructions Income taxation of nonresident foreign corporate entities.

1.2 Taxation in accordance with the Act on the Taxation of nonresidents’ income

Nonresident taxpayers are taxed in accordance with the Act on the Taxation of nonresidents’ income (Laki rajoitetusti verovelvollisen tulon verottamisesta 627/1978). Dividends, interest and royalties received by nonresident taxpayers from Finland are within the scope of tax at source (section 3, subsection 1 of the Act on the Taxation of nonresidents’ income). Tax at source (also often referred to as withholding tax in English) is a final tax, which is withheld from gross income at the source by the payer of the income. However, tax at source can be refunded to a taxpayer if the amount of tax at source withheld was higher than what is required by an international convention or tax was otherwise withheld incorrectly and the party obligated to withhold tax has not adjusted the withholding (section 11 of the Act on the Taxation of nonresidents’ income). Tax at source can be refunded to the taxpayer after the income payment year.

In certain situations, the taxation of nonresident taxpayers will be carried in accordance with the Act on Assessment Procedure (Laki verotusmenettelystä 1558/1995). Income taxed in accordance with the Act on Assessment Procedure is listed in section 13 of the Act on the Taxation of nonresidents’ income. For example, a natural person can request their dividend income to be taxed in accordance with the Act on Assessment Procedure (section 13, subsection 1(3) of the Act on the Taxation of Nonresidents’ Income). In these situations, a nonresident taxpayer's tax is levied from net income in accordance with the provisions of the income taxation of resident taxpayers (section 13a of the Act on the Taxation of Nonresidents’ Income).

Tax rates in accordance with the Act on the Taxation of Nonresidents’ Income will only apply unless otherwise defined in the provisions of a treaty entered into with a foreign country or another international convention, which Finland has joined, on the taxation of income or assets (section 1, subsection 3 of the Act on the Taxation of Nonresidents’ Income). When a tax treaty is applicable, Finland’s right to tax is, therefore, usually limited to the tax rate set in the tax treaty’s article on dividends, interest or royalties. The tax rate in accordance with tax treaties applicable to dividends and royalties paid from Finland to another country can be checked in the table Tax rates on dividends and other payments from Finland to nonresidents.

Another international convention as referred to in section 1, subsection 3 of the Act on the Taxation of Nonresidents’ Income can concern an international organisation, such as the United Nations (UN). According to article 2, section 7 of the Convention on the Privileges and Immunities of the United Nations, its assets, income and other property are exempt from all direct taxes.

The provisions of a tax treaty or another international convention can be applied at the time of payment by the payer of the income if the income recipient provides the payer with a declaration of their residence and other requirements for applying the tax treaty before making the payment. As a declaration, the income earner may present a tax at source card or indicate their name, date of birth and any other official identifier, and their address in their country of residence (section 10 of the Act on the Taxation of Nonresidents’ Income).

Section 10b of the Act on the Taxation of Nonresidents’ Income applies to dividends paid for a listed company’s nominee registered shares, according to which the dividend provisions of an international convention can be applied if the dividend payer or the intermediary that is closest to the dividend beneficiary and is registered in the Finnish Tax Administration’s Register of Authorised Intermediaries has taken reasonable measures to determine the dividend beneficiary's country of residence and to verify that the dividend provisions can be applied to the dividend recipient (section 10b, subsection 2 of the Act on the Taxation of Nonresidents’ Income). A tax at source card issued by the Finnish Tax Administration, a certificate issued by the tax authority of the dividend beneficiary's country of residence or an Investor Self-Declaration by the dividend beneficiary that indicates the dividend beneficiary’s information necessary for taxation at source can be deemed to be a reasonable measure to determine the dividend beneficiary’s country of residence (section 10b, subsection 4 of the Act on the Taxation of Nonresidents’ Income).

For the withholding of the tax rate in accordance with a tax treaty or another international convention, the income recipient must provide the payer with the information and documentation it requires and the assurance required to verify the correctness of the information. The declaration required in the situations laid down in section 10b of the Act on the Taxation of Nonresidents’ Income must be provided to the payer or authorised intermediary. If the recipient provides the payer or authorised intermediary with incorrect, incomplete or misleading information for the withholding of tax at source, due to which tax at source remains unwithheld, the unwithheld tax may be imposed on the income recipient.

More information on the withholding of tax at source and related procedures is available in The Finnish Tax Administration’s following instructions:

• Withholding tax at source on dividends, interest and royalties, and the payor’s obligations
• Authorised intermediary’s responsibilities and liabilities
• The contents, period of validity and verifying the reliability of the Investor Self-Declaration

If a nonresident taxpayer is entitled to benefits of a tax treaty or another international convention, but the treaty was not applied to tax at source or the amount of tax withheld is otherwise too high, the nonresident taxpayer can apply for the excessively withheld tax at source to be refunded by the Finnish Tax Administration. For applying the correct tax rate, a nonresident taxpayer can also request a tax at source card or an advance ruling from the Finnish Tax Administration.

2 Tax treaty and EU tax law

2.1 Tax treaty law

2.1.1 General information on tax treaties

Tax treaties contain provisions on the right to tax between the source state and the country of residence and the elimination of double taxation when a person residing in one contracting state receives income from the other contracting state. Tax treaties are enforced in Finland by law.  Finland’s valid tax treaties are available in the Finnish Tax Administration’s instructions Tax treaties.

Tax treaties can only limit the right to tax as laid down in Finland’s national legislation (the “golden rule” of tax treaties). Therefore, the provisions of tax treaties will only apply if the tax consequences pursuant to a tax treaty are more advantageous to a taxpayer than the tax treatment in accordance with the national legislation. For example, a nonresident taxpayer cannot be taxed on interest income for which the nonresident taxpayer is not liable to pay tax on the basis of section 9, subsection 2 of the Act on Income Tax, even if a tax treaty permits this.

A tax treaty’s provisions on dividends, interest and royalties do not affect the treatment of income in accordance with the national legislation in Finland. Tax treaties’ articles only determine to what extent Finland has the right to tax the income in question. For example, income regarded as dividends in Finland’s national tax law may not be regarded as dividends under the tax treaty's dividend article, or vice versa (for example, see Supreme Administrative Court 2006:75).  

As a rule, tax treaties are always interpreted according to the wording of the tax treaty. However, Finland’s income tax treaties largely follow the Organisation for Economic Co-operation and Development’s (OECD) model tax treaty. This is why the commentary of the OECD model tax treaty on the interpretation of the treaty is also significant when interpreting the provisions of a tax treaty in accordance with the OECD model tax treaty in Finland, regardless of whether the other contracting state is an OECD member or not (see Supreme Administrative Court 2011:101).

The OECD model tax treaty and its commentary must be taken into account as an interpretation tool according to the same purpose as it had when the tax treaty was signed. If the content of the model tax treaty’s commentary is later clarified but the interpretation of the content remains unchanged, these clarifications can also be used as help when interpreting previously signed treaties similar to the OECD model tax treaty (see Supreme Administrative Court 2002:26). More information on the significance of the OECD model tax treaty in the interpretation of Finland’s tax treaties and the interpretation of tax treaties in general is available in the Finnish Tax Administration’s instructions Articles of tax treaties (Section 1).

Finland’s individual tax treaties may differ from the OECD model tax treaty with regard to the content and the order of the articles. Furthermore, the tax treaties may include separate additional protocols and preparatory material that need to be taken into account in the interpretation of the tax treaty. Therefore, even though the OECD model tax treaty and its commentary are important when interpreting tax treaties, the preconditions of applying the articles of a single tax treaty are always tax treaty-specific.

In addition, the Multilateral Convention that entered into force in Finland on 13 February 2019 must also be taken into account when applying tax treaties. More information on the Multilateral Convention is available in the Finnish Tax Administration’s instructions Tax treaties.

2.1.2 Requirements for the application of tax treaties

Resident of a contracting state

The application of a tax treaty always requires that the income recipient who is a nonresident taxpayer is a person residing in the other contracting state in accordance with the tax treaty, i.e. is a tax treaty subject. A certificate of fiscal residence issued by the tax authority of the other contracting state is usually regarded as a sufficient indication that a natural person or a corporate entity is a person residing in the other contracting state as referred to in the tax treaty.

According to Article 4 of the OECD model tax treaty, “resident of a contracting state” means any person who, under the law of that state, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein. The content of the residency articles of Finland’s tax treaties largely correspond to the aforementioned definition laid down in the OECD model tax treaty.

According to the model tax treaty’s commentary, the term "person" must be interpreted very broadly. Therefore, the application of a tax treaty usually depends on whether the person is regarded as liable to pay tax in the other contracting state according to its tax law. Tax liability means a person’s obligation to pay tax on their worldwide income in their country of residence. A (nonresident) taxpayer who is liable to tax in that State in respect only of income from sources in that State is not regarded as a person residing in that contracting state.

In Finland, a nonresident income recipient who, according to the other contracting state’s national tax law, is a separate taxpayer in that state, is usually regarded as a resident of the other contracting state and as a tax treaty subject, even if the taxpayer was de facto exempt from income tax by virtue of special provisions in their country of residence (see Supreme Administrative Court 2004:111).

However, transparent flow-through foreign units are not typically regarded as separate taxpayers in their country of residence, and they are not, therefore, usually regarded in Finland as residents of another contracting state or as tax treaty subjects (see Supreme Administrative Court 2004:116). If income is paid to a foreign entity regarded as a transparent flow-through unit in taxation of its country of residence, the tax treaty between Finland and the country of residence of a unitholder or a partner of such flow-through unit may, however, be applicable and limit Finland’s right to tax (see Central Tax Board 72/2009 and 195/1997).

The beneficial owner of income

The application of the provisions of tax treaties on dividends, interest and royalties usually require, among other factors, that the person residing in the other contracting state is the beneficial owner of the dividend, interest or royalty income. This requirement comes from the OECD model tax treaty in which the tax treaty benefits concerning dividends, interest and royalties (Articles 10, 11 and 12) apply only to the beneficial owner of the income. In Finland’s tax treaties, this requirement is usually expressed in dividend, interest and royalty articles using such terms as “the owner of the benefit” ("etuuden omistaja") or “who has the right” ("jolla on oikeus") to dividends, interest or royalties. The majority of Finland’s tax treaties contain the beneficial owner requirement.

Finland has no published case law regarding the interpretation of the tax treaties’ beneficial owner requirement in the taxation of nonresident taxpayers. Because in Finnish case law significance has been given to the OECD model tax treaty’s commentary when interpreting tax treaty provisions based on the model tax treaty, the content of the model tax treaty’s commentary must be taken into account when interpreting the beneficial owner concept.

The beneficial owner concept was added to the OECD model tax treaty and its commentary in 1977. The revised texts concerning the concept of beneficial ownership added later to the OECD commentary can be regarded as statements clarifying the interpretation of the concept. Therefore, when interpreting the concept, significance can also be given to such model tax treaty’s interpretation instructions on the concept of beneficial ownership that have been added to the commentary after signing the tax treaty. However, it is required that there are no specific grounds for an interpretation differing from the commentary or pertaining to a specific version of the commentary with regard to a single tax treaty. When interpreting the concept of beneficial ownership, any special characteristics related to a single tax treaty and the tax treaty’s possible preparatory material and additional protocols must always be taken into account.

According to the OECD model tax treaty's commentary, the recipient is the “beneficial owner” of that income when they have the right to use and enjoy the income unconstrained by a contractual or legal obligation to pass on the payment received to another person. An agent, nominee or conduit company acting as a fiduciary or administrator is not the beneficial owner because that recipient’s right to use and enjoy the income is constrained by a contractual or legal obligation to pass on the payment received to another person. Such an obligation will normally derive from relevant legal documents but may also be found to exist on the basis of facts and circumstances showing that, in substance, the recipient clearly does not have the right to use and enjoy the income unconstrained by a contractual or legal obligation to pass on the payment received to another person. This type of obligation would not include contractual or legal obligations that are not dependent on the receipt of the payment by the direct recipient such as an obligation that is not dependent on the receipt of the payment and which the direct recipient has as a debtor or as a party to financial transactions, or typical distribution obligations of pension schemes and of collective investment vehicles.

The beneficial owner of income as referred to in the tax treaty may not necessarily be the legal owner of the shares, debt claims or intangible rights or property in respect of which the dividends, interest or royalties are paid. For example, if income received from Finland is paid to a foreign unit which is regarded as a flow-through unit and which is not a separate taxpayer and tax treaty subject in its country of residence, the unitholder or the partner of such a flow-through unit may be the beneficial owner of income as referred to in the tax treaty. In such a situation, the tax treaty between Finland and the country of residence of the unitholder or the partner of the flow-through unit may be applicable and limit Finland’s right to tax. However, the aforementioned requirements for the beneficial owner of the income must also be met, meaning that there cannot be any contractual or legal obligations to pass on the income to another person.

If the requirement set for the beneficial owner of income is not met, no tax benefit pursuant to tax treaty articles on dividends, interest or royalties will be provided. A tax treaty benefit can also be refused based on anti-abuse provisions, if the requirements for their application are met, even if the income recipient were the beneficial owner of income as referred to in the tax treaty. More information on limitations to tax treaty benefits and the prevention of misuse is available in the Finnish Tax Administration’s instructions Articles of tax treaties (Section 2.27).

2.2 EU tax law

2.2.1 Basic freedoms and restrictions on them

The EU’s treaties are international conventions between its Member States that form the basis of the EU’s activities. Through the treaties, the Member States have transferred their national powers to the EU’s governing bodies. Considering taxation, the most significant treaty is the Treaty on the Functioning of the European Union (TFEU). It guarantees the free movement of goods, individuals, services and capital from one EU state to another, as well as equal treatment regardless of the nationality or origin. As the TFEU’s articles that guarantee basic freedoms have a direct effect, they take precedence over national provisions in cases of conflict.

Considering the taxation of nonresidents’ dividends, interest and royalties, the most significant TFEU articles on basic freedoms include Article 49 (freedom of establishment) and Article 63 (free movement of capital). The freedom of establishment only applies in the European Single Market. The scope of the free movement of capital is broader, as it also covers third countries outside the EU.

The tax laws of an EU Member State cannot restrict the use of the TFEU’s basic freedoms. In accordance with settled case law of the Court of Justice of the European Union, a prohibited restriction contrary to the freedom of establishment and the free movement of capital may arise if an EU Member State applies different rules to comparable situations or same rules to different situations in cross-border and domestic situations, if this places the cross-border situation at a de facto disadvantage (see Case C‑156/17, KA Deka).

However, restriction of a basic freedom may be justified by overriding reasons in the public interest, provided that the restrictions are appropriate for securing the attainment of the objective pursued and do not go beyond what is necessary for attaining that objective (principle of proportionality). Such justifications accepted in the settled case law of the Court of Justice of the European Union have included the prevention of tax evasion (see Case C-196/04, Cadbury Schweppes), preservation of the balanced allocation of the power to impose taxes between the Member States (see Case C-446/03, Marks & Spencer), and safeguarding the coherence of the tax system (see Case C-123/15, Feilen).

The Agreement on the European Economic Area (EEA) provides citizens of the EEA states with similar basic freedoms as the TFEU provides for citizens of the EU Member States. States within the scope of the EEA Agreement include Norway, Liechtenstein and Iceland.

2.2.2 Tax at source in EU law

As a rule, withholding tax at source from nonresident taxpayers is in accordance with the EU law (see Case C-290/04, Scorpio). Nevertheless, tax at source may lead to conflicts with the TFEU’s requirements.

The impact of the EU law on taxation on dividends, interest and royalties has largely been addressed in the provisions of the Act on the Taxation of Nonresidents’ Income to prevent taxation at source leading to a stricter tax treatment in cross-border situations which would be contrary to the EU law. As a result, the Act on the Taxation of Nonresidents’ Income includes many exceptions especially to the amount of tax at source on dividend income. The aim of these provisions is to place the tax treatment of nonresident taxpayers’ dividend income in the same position as the resident taxpayers’ income taxation in a comparable domestic situations.

However, in certain situations the TFEU’s basic freedoms may prevent the withholding of tax at source from income in accordance with the Act on the Taxation of Nonresidents’ Income (see Supreme Administrative Court 2015:9). Normally, the impact of the basic freedoms on the taxation of nonresidents’ income concern dividend income which a nonresident taxpayer receives from Finland. The taxation of recipients of interest and royalties does not usually cause problems with the EU law, as interest is not primarily taxable income in Finland in cross-border situations and the taxation of recipients of royalties does not include specific reliefs in domestic situations.

Finland’s right to tax dividends, income and royalties received by nonresident corporate entities is also affected by the EU’s directives. No tax at source is withheld on interest and royalties paid to associated companies residing in the Member States in accordance with the Interest and Royalties Directive (2003/49/EC; see Section 5.3). Furthermore, no tax at source needs to be paid on dividend payments in situations in accordance with the Parent Subsidiary Directive (2011/96/EU; see Section 3.4.3).

3 Dividends

3.1 Dividends in national legislation

3.1.1 The definition of dividends

Finland’s tax laws do not define the term dividend. As a result, the dividend concept in taxation is primarily based on the provisions of the Limited Liability Companies Act (624/2006). The distribution of assets to shareholders as profit on the basis of a decision made at a shareholders’ meeting is usually regarded as dividends in taxation (see Central Tax Board 33/2018). Dividends include those paid in cash or in other assets (in kind). Dividends also include income which a shareholder receives in place of the distribution of funds when subscribing, by their own choice, to the number of new shares issued by the company distributing dividends in a free share issue, equalling the amount of dividends paid in cash (scrip dividends, see Supreme Administrative Court 2020:116).

In taxation, dividends also include the distribution of assets from an unrestricted equity reserve in accordance with chapter 13, section 1, subsection 1(1) of the Limited Liability Companies Act. As an exception to this ground rule, the distribution of assets from a company other than a listed company is, however, regarded as a transfer if the requirements laid down in section 45a of the Act on Income Tax or section 6c of the Act on the Taxation of Business Income (Laki elinkeinotulon verottamisesta 360/1968) are met.

In taxation, substitute dividends received in place of dividends are comparable to dividends in accordance with section 33d, subsection 3 of the Act on Income Tax. Substitute dividends mean reimbursements equalling the amount of dividends that are paid in place of dividends on the basis of a share lending agreement, repurchase agreement or other such contractual arrangement, through which the right to receive dividends has temporarily been transferred to another taxpayer (section 31, subsection 5 of the Act on Income Tax).

More information on the concept of dividends, dividends in kind and the distribution of assets from an unrestricted equity reserve is available in the Finnish Tax Administration’s following instructions:

• Taxation of dividend income (available in Finnish and Swedish)
• Taxation of non-cash dividends
• Distribution of assets from an unrestricted equity fund in taxation (available in Finnish and Swedish)

3.1.2 Dividends received from Finland

Dividends, the surplus received from a cooperative and other comparable income received from a Finnish limited liability company, cooperative or other corporate entity are taxable income received from Finland for nonresident taxpayers (section 10, subsection 6 of the Act on Income Tax). Based on section 9, subsection 9 of the Act on Income Tax, dividends are also income received from Finland when they have been received from a foreign corporate entity that is a resident taxpayer from Finland based on its place of effective management.

Tax at source is withheld from dividends paid to nonresident taxpayers (section 3, subsection 1 of the Act on the Taxation of Nonresidents’ Income). Because the Act on the Taxation of nonresidents’ income does not include any separate definition of dividend, the term dividend has the same meaning as in the Act on Income Tax when applying the Act on the Taxation of Nonresidents’ Income. In addition, the Act on the Taxation of Nonresidents’ Income separately lays down that the act’s provisions on dividends are applicable to the following income items (section 3, subsection 2 of the Act on the Taxation of Nonresidents’ Income):

• the distribution of assets from an unrestricted equity fund regarded as dividends (sections 33a and 33b of the Act on Income Tax, and section 6a of the Act on the Taxation of Business Income),
• the surplus received from a cooperative or the distribution of assets from an unrestricted equity fund regarded as a surplus (sections 33a and 33f of the Act on Income Tax, and section 6d of the Act on the Taxation of Business Income),
• profit from an investment fund (section 32 of the Act on Income Tax),
• substitute dividend (section 31, subsection 5 of the Act on Income Tax),
• hidden dividend (section 29 of the Act on Assessment Procedure), and
• income increased as a transfer pricing adjustment (section 31 of the Act on Assessment Procedure).

3.2 Dividends when applying a tax treaty

3.2.1 Dividend article in the model tax treaty

The dividend article in tax treaties determines to what extent the source state can tax income regarded as dividends in the tax treaty paid by a company residing in the source state to a resident in the other contracting state.

Article 10 of the OECD model tax treaty defines dividends as follows:

The term “dividends” as used in this Article means income from shares, “jouissance” shares or “jouissance” rights, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.

The model tax treaty’s commentary specifies the term “dividends” to basically mean the income distributed by companies defined in the model tax treaty. According to Article 3 of the model tax treaty, the term “company” means any body corporate or any entity that is treated as a body corporate for tax purposes. According to the commentary, the definition of dividends therefore concerns primarily the distribution of profits, the title to which is constituted by shares. The definition assimilates to shares all securities issued by companies which carry a right to participate in the companies’ profits without being debt-claims.

According to the commentary, dividends include not only the distribution of profits, but also other payments made by companies to their shareholders. As long as such income is taxed as dividends in accordance with the law in the country of residence of the company distributing profit, the tax treaty’s relief is usually applicable. However, payments that reduce membership rights in a company are not normally regarded as dividends.

3.2.2 Applicability of the dividend article to income received from Finland

The distribution of assets to shareholders through the distribution of profits based on a decision made at a shareholders’ meeting, which is considered dividends in Finnish taxation, is regarded as dividends as referred to in the OECD model tax treaty. Dividends paid in cash or in other assets are regarded as income falling under the dividend article in tax treaties. The model tax treaty’s dividend article also covers income received on the basis of a free share issue carried out in a scrip dividend procedure.

If income distributed from an unrestricted equity reserve is taxed as dividends, the dividend article’s provisions can be applied to the income, provided that the tax treaty’s dividend article corresponds to the OECD model tax treaty (Central Tax Board 44/2019, no change (Supreme Administrative Court, 25 November 2020, record 4276)).

Substitute dividends are generally not “dividends” within the meaning of the OECD model tax treaty. Instead, from the perspective of the relevant tax treaty and how it is applied, such a payment in the hands of the recipient is “business profits” as referred to in Article 7, or “other income” as referred to in Article 21.

The tax treaty’s dividend article may also cover income other than that taxed as dividends in accordance with the Act on Income Tax. For example, hidden dividends received by a nonresident taxpayer from Finland can usually be regarded as dividends as referred to in the tax treaty. In addition, surplus received by a nonresident taxpayer from Finland from a Finnish resident cooperative based on units or shares is usually regarded as dividends as referred to in the tax treaty. More information on the tax treatment of assets received by nonresident taxpayers from cooperatives is available (in Finnish and Swedish) in the Finnish Tax Administration’s instructions Taxation of cooperatives and their members (Sections 3.7 and 4.3.3).

Profits from investment funds paid from Finland are not generally regarded as income falling under the tax treaty’s dividend article, but as income not separately defined in the treaty (Supreme Administrative Court 1999:34). However, the tax treaty between Finland and Germany is an exception, according to which dividend provisions apply to profits of investment funds (Article 10, paragraph 3).

3.3 Dividends received by natural persons

3.3.1 General tax rates in the Act on the Taxation of Nonresidents’ Income and tax treaties

As a rule, the tax at source rate withheld from dividends paid to a natural person who is a nonresident taxpayer is 30%, unless a tax treaty limits Finland’s right to tax (section 7, subsection 1 of the Act on the Taxation of Nonresidents’ Income).

When a natural person who is a nonresident taxpayer receives dividends from nominee registered shares in a Finnish listed company, the payer is obligated to withhold tax at source of 35% if the payer or authorised intermediary does not have the information on the dividend recipient as laid down in section 15e of the Act on Assessment Procedure (section 7, subsection 2 of the Act on the Taxation of Nonresidents’ Income). In such a situation, the payer cannot apply the tax at source rate of 30% as laid down in section 7, subsection 1 of the Act on the Taxation of Nonresidents’ Income or a lower tax rate to dividends paid for nominee registered shares.

No tax at source is required to be paid on dividends received on the basis of shares in an equity savings account as laid down in the Act on Equity Savings Accounts (Laki osakesäästötilistä 680/2019) (section 3, subsection 11 of the Act on the Taxation of Nonresidents’ Income). More information on the taxation of nonresidents’ equity savings accounts is available (in Finnish and Swedish) in the Finnish Tax Administration’s instructions Taxation of equity savings accounts (Section 13.3).

Finland’s tax treaties typically limit the right to tax dividends paid from Finland as laid down in the Act on the Taxation of Nonresidents’ Income. As a rule, tax treaties provide Finland with the right to withhold tax at source of 10–15% on dividend income received by a natural person who is a nonresident taxpayer in Finland. In addition, Finland has entered into tax treaties, in which the right to tax dividends has only been granted for the nonresident taxpayer’s country of residence. Finland has entered into such tax treaties with Ireland, the UK, Mexico and France. Furthermore, dividends are not taxed in Finland based on the tax treaty between Finland and the United Arab Emirates if the dividends are paid to a person who is domiciled in the United Arab Emirates.

Tax rates applied to dividend income can be checked in the table Tax rates on dividends and other payments from Finland to nonresidents.

3.3.2 Taxation in accordance with the Act on Assessment Procedure

According to section 13, subsection 1(3) of the Act on the Taxation of Nonresidents’ Income, a natural person who is a nonresident taxpayer and resides in an EEA Member State can request dividends to be taxed in accordance with the Act on Assessment Procedure if:

• The Directive on Administrative Cooperation applies to the dividend recipient’s state of residence (act on the national implementation of provisions in the field of taxation in the Council Directive on administrative cooperation in the field of taxation and on repealing Directive 77/799/EEC as amended by amendments to Directive 2011/16/EU, insofar as the case concerns Directive (EU) 2015/2376 on the mandatory automatic exchange of information in the field of taxation), or a treaty on administrative cooperation and the exchange of information in tax matters in the European Economic Area is applicable; and
• Tax at source on dividends cannot de facto be credited in full in the dividend recipient’s country of residence on the basis of a treaty on the elimination of double taxation between Finland and the country of residence.

In these situations, dividends received from Finland will be taxed similarly to dividends received by resident taxpayers (sections 13a and 15 of the Act on the Taxation of Nonresidents’ Income). More information on the taxation of resident taxpayers’ dividend income is available (in Finnish and Swedish) in the Finnish Tax Administration’s instructions Taxation of dividend income.

Based on Article 63 of the TFEU on the free movement of capital, a natural person residing in a state other than an EEA state can request that tax at source withheld in Finland corresponds to the amount of tax that would be withheld if taxation was carried out similarly to taxation on dividends received by a resident taxpayer in accordance with the Act on Assessment Procedure (see Supreme Administrative Court 2015:9). In these situations, the taxation in accordance with the Act on Assessment Procedure requires that Finland has entered into an agreement on administrative cooperation and the exchange of information in tax matters with the person’s country of residence and that the person cannot de facto have Finnish taxes credited in full in their country of residence during the tax year or subsequent tax years based on the tax treaty between Finland and the person’s country of residence.

A request for carrying out taxation in accordance with the Act on Assessment Procedure cannot usually be made until after taxation in the country of residence has ended. Dividend recipients can request taxation to be carried out in accordance with the Act on Assessment Procedure by submitting an application for a refund of tax at source to the Finnish Tax Administration.

3.4 Dividends received by corporate entities

3.4.1 General tax rates in the Act on the Taxation of Nonresidents’ Income and tax treaties

As a rule, the tax at source rate withheld from dividends paid to a corporate entity that is a nonresident taxpayer is 20%, unless a tax treaty limits Finland’s right to tax (section 7, subsection 1 of the Act on the Taxation of Nonresidents’ Income).

When a corporate entity that is a nonresident taxpayer receives dividends from nominee registered shares in a Finnish listed company, the payer is obligated to withhold tax at source of 35% if the payer or authorised intermediary does not have the information on the dividend recipient as laid down in section 15e of the Act on Assessment Procedure (section 7, subsection 2 of the Act on the Taxation of Nonresidents’ Income). In such a situation, the payer cannot apply the tax at source rate of 20% as laid down in section 7, subsection 1 of the Act on the Taxation of Nonresidents’ Income or a lower tax rate to dividends paid for nominee registered shares. However, tax at source of 30% can also be withheld from dividends paid for nominee registered shares if the payer or authorised intermediary has access to the dividend recipient’s identification information, but it does not have sufficient information to ensure that the recipient is a corporate entity and that the tax rate of 20% could be applied.

Finland’s tax treaties often limit the right to tax dividends paid from Finland as laid down in the Act on the Taxation of Nonresidents’ Income. Normally, Finland’s tax treaties set a lower tax rate for direct investment dividends. Provisions on direct investment dividends apply when dividends are paid to a company as referred to in the tax treaty and residing in the other contracting state if it has sufficient holdings in the company paying the dividends. The definitions of direct investment dividends in Finland’s tax treaties usually require that the company to which dividends are paid holds at least 10–25% of the capital of the company distributing dividends. The percentage required varies depending on the tax treaty. In Finland’s certain tax treaties, direct investment dividends require the holding of a certain number of votes in the company distributing dividends instead of capital holdings.

As a rule, Finland’s tax treaties provide the source state with the right to withhold tax at source of 10–15% on dividends other than direct investment dividends received by corporate entities. Tax at source of 0–5% can usually be withheld on direct investment dividends. Finland has also entered into tax treaties that completely prevent taxation in the source state, regardless of whether dividends are direct investment dividends. Finland has entered into such tax treaties with Ireland, the UK, Mexico and France. Furthermore, dividends are not taxed in Finland based on the tax treaty between Finland and the United Arab Emirates if the dividends are paid to a corporate entity that has received the status of a legal person in the United Arab Emirates. In addition, pension funds have been exempted from tax in Finland’s certain tax treaties. Such treaties exist with such countries as the Netherlands, the USA and Spain.

Tax rates applied to dividend income can be checked in the table Tax rates on dividends and other payments from Finland to nonresidents.

3.4.2 Dividends paid for shares as part of investment assets

Tax at source of 15% is withheld on dividends paid to shares belonging to a nonresident taxpayer’s investment assets (section 7, subsection 1(3) of the Act on the Taxation of Nonresidents’ Income). Investment assets include securities acquired by financial, insurance and pension institutions for the investment of assets as laid down in section 11 of the Act on the Taxation of business income. The tax at source rate of 15% requires that (section 7, subsection 1, paragraph 3(a–c) of the Act on the Taxation of Nonresidents’ Income):

a) the dividend recipient is a nonresident corporate entity as laid down in section 3, subsection 5, and the dividend recipient is not a company listed in the Parent Subsidiary Directive, which directly holds at least 10% of the share capital of the corporate entity that distributes the dividends when the dividend is distributed;

b) the dividend recipient is a foreign corporate entity equivalent to a Finnish pension institution, whose residency is in the European Economic Area, and the dividend recipient is not a company listed in the Parent Subsidiary Directive, which directly holds at least 10% of the share capital of the corporate entity that distributes the dividends when the dividend is distributed; or

c) the dividend recipient is a foreign corporate entity equivalent to a Finnish pension institution, which directly holds less than 10% of the share capital of the corporate entity that distributes the dividends, Finland has entered into an agreement on the exchange of information on tax matters with the dividend recipient’s country of residency, and sufficient information is obtained from the dividend recipient’s country of residency for the tax assessment.

3.4.3 Dividends received by foreign pension institutions and life insurance providers

Pension institutions equivalent to Finnish pension institutions can request a deduction of the dividend income received based on shares belonging to their investment assets, which decreases the amount of tax at source withheld on the dividends. According to section 3, subsection 7 of the Act on the Taxation of Nonresidents’ Income, if dividends are paid on shares treated as investment assets by the recipient, a deduction is permitted, in reference to section 8, subsection 1(10) of the Act on the Taxation of business income, corresponding to the share of dividends received from Finland of their turnover.

The application of section 3, subsection 7 of the Act on the Taxation of Nonresidents’ Income requires that: 

• the dividend recipient is a foreign corporate entity equivalent to a Finnish pension institution whose residency is in the EEA; or
• the dividend recipient is a foreign corporate entity equivalent to a Finnish pension institution, whose residency is outside the EEA and which directly holds less than 10% of the share capital of the corporate entity that distributes the dividends, Finland has entered into an agreement on the exchange of information on tax matters with the dividend recipient’s country of residency, and sufficient information is obtained from the dividend recipient’s country of residency for the tax assessment.

In addition, it is always required that the dividend recipient provides the Finnish Tax Administration with a declaration of the amount of and grounds for the deduction. More information on the calculation of and grounds for the amount of deduction made by pension institutions is available in the Finnish Tax Administration’s instructions Taxation of dividends received by foreign entities offering statutory pension insurance.

On the basis of the Supreme Administrative Court’s decision 2016:77, section 3, subsection 7 of the Act on the Taxation of Nonresidents’ Income also applies to dividends paid for Finnish shares related to investment-linked insurance products of foreign life insurance providers considered equivalent to Finnish life insurance providers. According to the decision, from 2015 onwards, the deduction made from tax at source on dividends paid to a life insurance provider in Finland is calculated in the same way as for foreign pension institutions. However, in these situations the amount of expenses withheld by the company from policyholders with regard to dividend income must be deducted before the deduction is calculated from the total amount of dividends received from Finland in accordance with section 3, subsection 7 of the Act on the Taxation of Nonresidents’ Income.

In practice, the deduction made by a foreign pension institution or life insurance provider can only be addressed in the tax at source refund procedure because it is practically always difficult for a foreign corporate entity to provide all the declarations required by law on the dividend payment date or during the dividend payment year. To receive the deduction, foreign life insurance providers must present the same information and declarations that are required from foreign pension institutions, where applicable. In addition, life insurance providers must provide the Finnish Tax Administration with a declaration of the amount of management fees that have been charged from policyholders with regard to dividend income. The Finnish Tax Administration’s instructions for tax at source on foreign pension institutions can also be used in situations concerning life insurance providers, where applicable.

3.4.4 Tax-exempt dividends based on the Act on the Taxation of Nonresidents’ Income

Dividends received by nonresident corporate entities are wholly tax-exempt under certain conditions in accordance with the Act on the Taxation of Nonresidents’ Income.

Parent subsidiary directive

Based on section 3, subsection 6 of the Act on the Taxation of Nonresidents’ Income, no tax at source needs to be paid on dividends that are paid to a company as referred to in Article 2 of the Parent Subsidiary Directive if the company directly holds at least 10% of the capital of the company paying the dividends. The percentage of share capital means the parent company’s holdings of its subsidiary’s shares. The company referred to in Article 2 of the Parent Subsidiary Directive means a company that meets the following requirements:

• The company takes any of the forms listed in Annex 1, part A to the directive (the annex lists all the company forms of the Member States to which the directive applies).
• The company is considered, according to the tax laws of a Member State, to be resident in that Member State for tax purposes.
• The company cannot be considered to be resident for tax purposes outside the EU on the basis of a tax treaty concluded with a third state.
• The company is obligated, without the possibility of an option or of being exempt, to pay any of the taxes listed in Annex 1, part B to the directive, or any other tax which may be substituted for any of those taxes.

The majority of dividend payments inside groups operating in the EU are exempted from tax at source on the basis of section 3, subsection 6 of the Act on the Taxation of Nonresidents’ Income.

A corporate entity residing in an EEA state as a dividend recipient

According to section 3, subsection 5 of the Act on the Taxation of Nonresidents’ Income, dividends received based on shares belonging to assets other than investment assets can be tax-exempt for foreign corporate entities when they are paid to a corporate entity resident of an EEA state equivalent to a Finnish corporate entity. The requirement for tax exemption is that the dividends would be tax-exempt when received by a Finnish corporate entity by virtue of section 33d, subsection 4 of the Act on Income Tax or section 6a of the Act on the Taxation of business income. In addition to income taxable as dividends, this provision applies, in accordance with the Act on the Taxation of Nonresidents’ Income, to:

• profits and interest paid for a Finnish savings bank’s basic fund share or a fund of funds investment, and
• the interest accrued on the guarantee capital of a mutual insurance company and an insurance association.

The table below presents taxation on dividends of Finnish corporate entities in the basic situations laid down in section 33d, subsection 4 of the Act on Income Tax and section 6a of the Act on the Taxation of business income. More information on taxation on dividend income is available (in Finnish and Swedish) in the Finnish Tax Administration’s instructions Taxation of dividend income.

Dividend distributor	Dividend recipient	Taxation of the dividend recipient
Listed company / unlisted corporate entity	Listed company	Dividends are tax-exempt income
Unlisted corporate entity	Unlisted corporate entity	Dividends are tax-exempt income
Listed company	Unlisted corporate entity	Dividends are tax-exempt income if the dividend recipient directly holds at least 10% of the share capital. If holdings are less than 10%, dividends are wholly taxable income.

Dividend income received from Finland by a nonresident corporate entity residing in an EEA state is similarly tax-exempt in the situations presented in the table in accordance with section 3, subsection 5 of the Act on the Taxation of Nonresidents’ Income. When determining whether a foreign taxpayer is equivalent to such a Finnish corporate entity for which dividends would be tax-exempt based on section 33d, subsection 4 of the Act on Income Tax or section 6a of the Act on the Taxation of business income, the primary focus is whether the foreign entity’s position based on civil-law perspective primarily corresponds to the position of a Finnish company form.

The exemption of dividends from tax in accordance with section 3, subsection 5 of the Act on the Taxation of Nonresidents’ Income also requires that:

• The Directive on Administrative Cooperation applies to the dividend recipient’s country of residence (act on the national implementation of provisions in the field of taxation in the Council Directive on administrative cooperation in the field of taxation and on repealing Directive 77/799/EEC as amended by amendments to Directive 2011/16/EU, insofar as the case concerns Directive (EU) 2015/2376 on the mandatory automatic exchange of information in the field of taxation), or a treaty on administrative cooperation and the exchange of information in tax matters in the European Economic Area is applicable.
• According to the dividend recipient’s declaration, tax at source on dividends cannot de facto be credited in full in the dividend recipient’s country of residence on the basis of a treaty on the elimination of double taxation between Finland and the dividend recipient’s country of residence.

The exemption of the dividend income from tax as laid down in section 3, subsection 5 of the Act on the Taxation of Nonresidents’ Income does not apply to dividends paid for shares belonging to investment assets, as 75% of the dividends would be taxable income for a Finnish corporate entity in a similar domestic situation (section 6a, subsection 3(1) of the Act on the Taxation of business income). In practice, the Finnish corporate entity therefore pays 15% of tax on the dividends received based on shares belonging to investment assets (20% corporate income tax rate × 75%). Correspondingly, tax at source of 15% is withheld from a nonresident taxpayer on dividends received based on shares belonging to investment assets (section 7, subsection 1(3) of the Act on the Taxation of Nonresidents’ Income). However, dividends received for shares belonging to investment assets are tax-exempt for a nonresident taxpayer if the tax exemption based on the Parent Subsidiary Directive applies to the dividends in accordance with section 3, subsection 6 of the Act on the Taxation of Nonresidents’ Income.

Foreign contractual funds equivalent to a Finnish investment fund or special common fund

According to section 3, subsection 10 of the Act on the Taxation of Nonresidents’ Income, tax at source does not need to be paid on dividends paid to a foreign contractual fund that is equivalent to a Finnish investment fund or special investment fund and meets the requirements for tax exemption laid down in section 20a of the Act on Income Tax. The exemption requires that the dividend recipient provides the Finnish Tax Administration with a declaration of the fulfilment of the requirements for the tax exemption.

More information on the requirements for applying section 20a of the Act on Income Tax and the declarations required is available in the Finnish Tax Administration’s instructions On the taxation of investment funds and the provisions of section 20a of the Income Tax Act.

3.4.5 Tax-exempt dividends based on EU law comparability request

The free movement of capital and the freedom of establishment may also prevent the taxation of foreign corporate entities’ dividends in situations that have not separately been defined as tax-exempt in the Act on the Taxation of Nonresidents’ Income. If a Finnish corporate entity has been provided with tax relief or tax exemption in taxation, a foreign taxpayer primarily has the right to enjoy the same tax benefits in an objectively comparable situation based on EU law. Because the free movement of capital also extends to third countries, the granting of a tax treatment equivalent to a Finnish corporate entity cannot be limited to corporate entities residing in EEA states only (see Supreme Administrative Court 2015:9).

In Finnish case law, the assessment of the comparability of situations has been based on the comparison and overall assessment of the legal and operational features of Finnish and foreign corporate entities. Significance has been given to which Finnish corporate entity the foreign corporate entity is most comparable to. In order to be found comparable, it has not been required that regulations targeted at the income recipient in its country of residence would be wholly similar to Finnish regulations. Finnish case law has not included applicable reasons in the public interest that would have justified stricter taxation on nonresident taxpayers when tax at source has remained the final expense for nonresident taxpayers (see Supreme Administrative Court 2015:9).

Therefore, dividends received by a foreign corporate entity in Finland can be tax-exempt based on EU law if the foreign corporate entity is comparable to such a Finnish corporate entity (or entities) for which similar dividends would be tax-exempt. Situations where the dividend income received by a foreign corporate entity comparable to a domestic entity can be tax-exempt in Finland based on the free movement of capital or the freedom of establishment are presented below.

Comparability of a taxpayer residing outside the EEA to a Finnish corporate entity for which dividends would be tax-exempt based on section 33d, subsection 4 of the Act on Income Tax or section 6a of the Act on the Taxation of business income

The tax exemption of dividend income for foreign corporate entities residing in an EEA state based on section 33d, subsection 4 of the Act on Income Tax or section 6a of the Act on the Taxation of business income is determined on the basis of the applicability of section 3, subsection 5 of the Act on the Taxation of Nonresidents’ Income (see Section 3.4.3). However, a corporate entity residing in a third state can also be comparable to such a Finnish corporate entity for which dividends would be tax-exempt based on section 33d, subsection 4 of the Act on Income Tax or section 6a of the Act on the Taxation of business income.

In the Supreme Administrative Court’s decision 2015:9, for example, a US-based legal person of the Delaware Statutory Trust type with closed capital was considered, based on its legal and operational characteristics, to be comparable to a listed Finnish company in Finnish taxation. Because similar dividends would have been tax-exempt for a listed Finnish company, no tax at source could be withheld on the dividends, as this would have restricted the free movement of capital.

Comparability to fully or partly tax-exempt Finnish corporate entities

Different countries often have entities that are engaged in similar activities as Finnish fully or partially tax-exempt corporate entities as defined in the Act on Income Tax, to which there are no specific provisions on comparability in the Act on the Taxation of Nonresidents’ Income. A nonresident taxpayer can also be found comparable to such a Finnish corporate entity.

Provisions on fully and partly tax-exempt Finnish corporate entities are laid down in sections 20–21c of the Act on Income Tax. In tax practice, some foreign public entities, for example, have been found comparable to Finnish public entities engaged in basic social assistance and public pension insurance activities as laid down in section 20 of the Act on Income Tax, such as the Social Insurance Institution of Finland (Kela) and Keva, for which similar dividends would be tax-exempt.

Comparability to a Finnish non-profit organisation

In Finland, non-profit organisations are tax-exempt from income other than business income on the basis of section 23 of the Act on Income Tax, as well as from real estate income, insofar as the real estate has been used for purposes other than general or non-profit activities. Not even large-scale investment activities of non-profit organisations have usually been regarded as business activities, which is why dividends are often tax-exempt for non-profit organisations. If dividends are part of the source of business income for a nonresident non-profit organisation, section 6a of the Act on the Taxation of business income will apply. In this case, the dividends received by the foreign corporate entity will be tax-exempt if the requirements laid down in section 3, subsection 5 of the Act on the Taxation of Nonresidents’ Income are met.

According to section 22 of the Act on Income Tax, a corporate entity is a non-profit organisation if

• it acts exclusively and solely for the public good from a tangible, spiritual, educational or societal perspective,
• its activities do not only concern a limited group of people, and
• it does not produce financial benefits for its members through its activities in the form of dividends, profits or unreasonably high wages or compensations.

All of the requirements listed in section 22 of the Act on Income Tax must be fulfilled at the same time in order to regard a corporate entity as a non-profit organisation. Whether a corporate entity can be regarded as a non-profit organisation is determined based on rules and actual activities. More information on determining whether a corporate entity can be regarded as a non-profit organisation is available (in Finnish and Swedish) in the Finnish Tax Administration’s instructions Tax guide for non-profit organisations.

A nonresident corporate entity comparable to a corporate entity in accordance with section 3 of the Act on Income Tax can be regarded as a non-profit organisation if its activities meet the requirements set for non-profit organisations in section 22 of the Act on Income Tax. Due to the requirements set out in EU law, no tax at source is withheld on dividends paid to a foreign non-profit organisation if similar dividends would be tax-exempt income for a Finnish non-profit organisation.

Submitting a comparability request based on EU law

If a nonresident corporate entity considers that tax at source withheld on its income received from Finland limits the freedom of establishment or the free movement of capital, it can request from the Finnish Tax Administration that the taxation of its income is treated as an comparable Finnish corporate entity would be treated based on EU law.

A comparability request can always be submitted to the Finnish Tax Administration with a tax at source refund application. A tax at source card can also be applied for, unless the comparability analysis requires information that can only be provided after the foreign entity’s taxation has ended. The taxpayer must provide sufficient grounds for being regarded as comparable to a Finnish entity. Comparability to a non-profit organisation requires a sufficient declaration of the fulfilment of the requirements set for non-profit organisations. In situations subject to interpretation, taxpayers can also apply for an advance ruling.

3.5 Special considerations

3.5.1 Dividends received from depositary receipts

A depositary receipt is a separate security that is issued by a bank and represents rights to shares according to a specific ratio. A depositary receipt can represent a fraction of a single share or one or more shares. Depositary receipts are managed by depositary banks. Shareholders’ rights are divided between the depositary bank and the holder of the depositary receipts according to the terms of the depositary receipts. Normally, depositary receipts can also be converted into ordinary company shares. Depositary receipts are usually used in trading in foreign stock exchanges similarly to other securities. For example, American Depositary Receipts are used in trading in different US stock exchanges (most typically AMEX, NYSE and Nasdaq). 

Depositary receipts make it easier to buy and hold company shares in international situations. Foreign investors do not need to buy shares in Finnish companies directly in the Finnish stock exchange, as they can purchase depositary receipts that are provided by banks and represent shares in Finnish companies in their home country’s stock exchange in their own currency. Depositary banks pay the income received from shares, such as dividends, to holders of depositary receipts.

It is considered in taxation practice that holders of depositary receipts, not the depositary bank that legally holds the share or shares subject to the depositary receipts, are primarily liable to pay tax on dividends received from Finland.  The tax treaty between Finland and the country of residence of the holder of depositary receipts can be applied to dividends if the requirements for the application of the tax treaty in question are met. The right of holders of depositary receipts to tax treaty benefits are determined as in other situations (for more information on the requirements for the application of tax treaties, see Section 2.2.2).

A nonresident taxpayer that has received dividends from Finland based on depositary receipts can apply for the tax at source withheld on the dividends to be refunded by the Finnish Tax Administration after the payment year if the tax treaty was not applied to tax at source or the amount of tax withheld was otherwise too high. The Finnish Tax Administration will always pay refunds in euros, even if dividends were paid to holders of depositary receipts in other currencies.

3.5.2 Dividends as part of a Finnish business partnership’s personal source of income

Limited and general partnerships, for example, are business partnerships (section 4, subsection 1(1) of the Act on Income Tax). Business partnerships are not separate taxpayers, but tax entities for which the results of different income sources are calculated. Business partnerships’ profit is split between the partners and taxed as their income (section 16 of the Act on Income Tax).

Dividends paid by a Finnish or foreign resident limited liability company can, in the taxation of a Finnish business partnership, be part of business, agricultural or personal sources of income. If dividends received by a business partnership are part of its personal source of income, the dividends will not be taken into account when calculating the income belonging to the partnership’s personal source of income. Dividends belonging to personal sources of income are taxed directly as partners’ income in accordance with the partners’ shares of the partnership’s income. Therefore, dividends are taxed as if each partner had received their dividends directly from the company distributing the dividends (section 16, subsection 4 of the Act on Income Tax).

Dividends paid by a resident limited liability company to a Finnish business partnership are exempted from withholding tax. However, dividends belonging to a business partnership’s personal source of income are dividend income received from Finland for the partnership’s nonresident partners on the basis of section 10, subsection 6 of the Act on Income Tax. According to section 3, subsection 1 of the Act on the Taxation of Nonresidents’ Income, tax at source must be paid on dividends, unless otherwise defined. Therefore, nonresident partners dividends belonging to a Finnish business partnership’s personal source of income are taxed in the tax at source procedure. Tax on dividends will be imposed on nonresident partners on the basis of section 16, subsection 2 of the Act on the Taxation of Nonresidents’ Income (see Section 6.2).

The amount of tax imposed on nonresident taxpayers is determined as if dividends had been paid directly to the nonresident taxpayer (see Sections 3.1–3.4). For example, if a tax treaty is applicable, the dividend provisions of the tax treaty between Finland and the partner’s country of residence will apply.

4 Interest

4.1 Interest in the national legislation

4.1.1 The definition of interest

Finnish tax laws do not include any general concept of interest. In case law and the tax practice a compensation paid for liabilities has been regarded as interest, usually defined as a certain percentage based on the debt capital and elapsed time. In taxation, payments other than those named as interest can be regarded as interest if their actual financial characteristics make them a compensation for liabilities.

Items that have been paid for capital investments regarded as shareholders’ equity in taxation fall outside the definition of interest. If no actual debt relationship exists, reimbursements paid for capital can be regarded as other payments. The type of reimbursements paid for different debt instruments located between liabilities and shareholders’ equity is determined on a case-by-case basis (see Central Tax Board 57/2009). In this case, the financial characteristics of the instrument will be taken into account in addition to its treatment in accounting.

More information on the concept of interest in case law and the tax practice is available (in Finnish and Swedish) in the Finnish Tax Administration’s instructions Deduction of interest in personal taxation (Section 2).

4.1.2 Interest in accordance with the Interest and Royalties Directive

Types of interest between associated companies within the scope of the tax exemption provision of the Interest and Royalties Directive are listed in section 3a, paragraph 1 of the Act on the Taxation of Nonresidents’ Income (for the requirements for applying tax exemption, see Section 5.3). According to this, interest means:

• income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and
• in particular, income from securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures.

Penalty charges for late payments are not regarded as interest as laid down in section 3a, paragraph 1 of the Act on the Taxation of Nonresidents’ Income.

4.2 Taxability of interest for nonresident taxpayers

According to section 10, paragraph 7 of the Act on Income Tax, interest income is taxable income received from Finland for nonresident taxpayers if the debtor is a person residing in Finland or a Finnish corporate entity, partnership, benefit under joint administration or death estate. Similarly, interest paid by a foreign corporate entity equivalent to a Finnish corporate entity is income received from Finland if the foreign corporate entity acting as the debtor is a resident taxpayer in Finland as a result of its place of effective management (section 9, subsection 9 of the Act on Income Tax).

Normally, interest received by nonresident taxpayers in Finland is tax-exempt. According to section 9, subsection 2 of the Act on Income Tax, nonresident taxpayers are not liable to pay tax on interest income received from Finland that has been paid for:

• accounts receivable resulting from foreign trade,
• assets deposited with a bank or other financial institution,
• State obligations, debentures or other bonds (for the taxation of nonresident taxpayers’ bonds, see the Finnish Tax Administration’s instructions (available in Finnish and Swedish) Taxation on bonds pursuant to the Act on Income Tax, Section 5.2), or
• such loans taken out in another country for Finland that cannot be regarded as a capital investment equivalent to the loan recipient’s equity.

The interest income taxable for nonresident taxpayers falling outside the scope of section 9, subsection 2 of the Act on Income Tax includes interest on deposits in a personnel service office and interest on deposits with a cooperative’s savings funds. Interest on a loan between private individuals or on a loan granted by a private individual for a limited liability company as a loan other than an equity loan, which a nonresident taxpayer has granted while still being a resident taxpayer in Finland, is also subject to tax.

According to section 3b of the Act on the Taxation of Nonresidents’ Income, interest payments between associated companies pursuant to the Interest and Royalties Directive are tax-exempt for nonresident corporate entities (for the requirements for applying tax exemption, see Section 5.3). In practice, interest pursuant to section 3b of the Act on the Taxation of Nonresidents’ Income is already tax-exempt based on section 9, subsection 2 of the Act on Income Tax.

If interest is exceptionally taxable income for nonresident taxpayers, tax at source must be withheld on it (section 3, subsection 1 of the Act on the Taxation of Nonresidents’ Income). According to the ground rule of section 7 of the Act on the Taxation of Nonresidents’ Income, the rate of tax at source withheld on interest is:

• 20% if the income earner is a corporate entity
• 30% if the income earner is a natural person

If a tax treaty is applicable to interest income, the tax treaty’s lower tax rate will apply instead of the tax rate pursuant to section 7 of the Act on the Taxation of Nonresidents’ Income.

4.3 Interest when applying a tax treaty

The interest articles of tax treaties determine to what extent the source state can tax interest arising in the source state which is paid to a resident in the other contracting state. In Finland’s tax treaties, the source state does not usually have any right to tax interest income, or the right to tax has been limited to a specific rate (typically 5–15%).

In the OECD model tax treaty, interest has been defined as follows:

The term “interest” as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.

Payments received from Finland and made for capital investments equivalent to shareholders’ equity are handled as dividends, not as interest as referred to in the tax treaty. According to the OECD model tax treaty’s commentary, interest on participating bonds should not normally be considered as a dividend, and neither should interest on convertible bonds until such time as the bonds are actually converted into shares. According to the commentary the interest on such bonds should, however, be considered as a dividend if the loan effectively shares the risks run by the debtor company, i.e. when repayment depends largely on the success or otherwise of the enterprise’s business. If a certain payment falls within the scope of both dividend and interest articles, the tax treaty’s dividend article will apply.

Interest as referred to in the OECD model tax treaty does not include penalty charges for late payments. For example, an increase in disability pension paid, due to a delay, as annual interest based on the interest rate determined in accordance with the Interest Act was not regarded as interest pursuant to the Nordic tax treaty in the Supreme Administrative Court’s decision 2021:28, as the Nordic tax treaty’s interest article corresponded to the OECD model tax treaty in this respect.

An index bonus received from an index loan is often regarded as interest income when applying a tax treaty. More information on index loans is available (in Finnish and Swedish) in the Finnish Tax Administration’s instructions Taxation on bonds pursuant to the Act on Income Tax (Sections 2.4 and 4.4).

5 Royalties

5.1 Royalties in the national legislation

5.1.1 The definition of royalties

Royalties, licence fees and other comparable compensations are income received from Finland if the assets or rights on which the compensations are based are used in business activities in Finland or if the party obligated to pay the compensations is a person residing in Finland or a Finnish corporate entity, partnership, benefit under joint administration or death estate (section 10, paragraph 8 of the Act on Income Tax). Similarly, royalties paid by a foreign corporate entity comparable to a Finnish corporate entity is income received from Finland if the foreign corporate entity is a resident taxpayer in Finland as a result of its place of effective management (section 9, subsection 9 of the Act on Income Tax).

The concept of royalties has been defined in section 3, subsection 3 of the Act on the Taxation of Nonresidents’ Income. According to the provision, royalties mean considerations for:

• the use of or the right to use a copyright for a literary, artistic or scientific work,
• the use of or the right to use a right on a photograph
• the use of or the right to use a patent, trademark, model, matrix, design, plan, a secret formula or process
• information concerning industrial, commercial or scientific experience.

Payments received by nonresident taxpayers for the use of or the right to use a film as laid down in section 13, subsection 1(4) of the Act on the Taxation of Nonresidents’ Income are also regarded as royalties.

5.1.2 Tax rates in accordance with the Act on the Taxation of Nonresidents’ Income

Royalties received by nonresident taxpayers in Finland are within the scope of tax at source (section 3, subsection 1 of the Act on the Taxation of Nonresidents’ Income). According to the ground rule of section 7 of the Act on the Taxation of Nonresidents’ Income, the rate of tax at source withheld on royalties paid to nonresident taxpayers are, unless a tax treaty limits Finland’s right to tax:

• 20% if the royalty recipient is a corporate entity
• 30% if the royalty recipient is a natural person

Reimbursements paid for the use of a film or the right to use a film are an exception, and they are taxed similarly to resident taxpayers’ income in accordance with the tax on assessment procedure (section 13, subsection 1(4) of the Act on the Taxation of Nonresidents’ Income). Nonresident taxpayers must declare such income by submitting a tax return. 

Royalties paid in associated situations referred to in the Interest and Royalties Directive are tax-exempt on the basis of sections 3a–e of the Act on the Taxation of Nonresidents’ Income (for more information, see Section 5.3).

5.2 Royalties when applying a tax treaty

5.2.1 Taxation on royalties pursuant to the model tax treaty in Finland

According to the OECD model tax treaty, only the country of residence of the beneficial owner of royalties has the right to tax royalty income arising in the source state, unless the recipient has a permanent establishment in the source state to which the royalties are attributed. However, many of Finland’s tax treaties also assign the right to tax to the source state, even if no permanent establishment is formed. In Finland’s tax treaties, the source state’s right to tax royalty income has mainly been limited to 0–10%. Tax rates applied to royalty income can be checked in the table Tax rates on dividends and other payments from Finland to nonresidents.

According to Article 12 of the OECD model tax treaty, royalties mean all payments of any kind received as a consideration for:

• the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films,
• the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process,
• information concerning industrial, commercial or scientific experience.

The OECD model tax treaty’s definition of royalties is very similar to the definition of royalties in Finland’s national legislation. Therefore, Finland can, as the source state, usually tax royalties that are taxable for nonresident taxpayers in accordance with section 10, paragraph 8 of the Act on Income Tax, with the limitations set out in the tax treaty’s royalty article, if the tax treaty’s definition of royalties corresponds to the OECD model tax treaty and the tax treaty provides the source state with the right to tax royalties. However, the definition of royalties must always be verified in the applicable tax treaty, as the definition of royalties in a single tax treaty may be more restricted than in the model tax treaty or Finland’s national legislation.

When the income is not income in accordance with the tax treaty’s royalty article, it is usually income in accordance with the tax treaty’s business income or capital gains article. In these situations, only the country of residence primarily has the right to tax in accordance with the tax treaty, unless the income is attributable to a nonresident taxpayer’s permanent establishment in Finland. More information on the taxation of business income is available in the Finnish Tax Administration’s instructions General Guidelines for the Attribution of Income to Permanent Establishment.

The OECD model tax treaty’s commentary includes specific instructions for the definition of royalties, and these are discussed below.

The transfer of copyrights

According to the commentary, the income received from computer software products does not fall in the category of copyrights, etc., if the software has been supplied to its recipient or purchaser in such a way that the latter only has the right to use the software, not receive any copyright to it (for more information, see ruling 2011:101 of Supreme Administrative Court).

However, if the underlying transaction that the payment relates to is a transfer of copyright from one party to the other, it must be treated as a payment of royalty. Examples include the transfer of rights to production, distribution, program editing and public presentation that would relate to the computer software concerned. The transaction does not fall into the scope of application of article 12 – Royalties, if the contract only sets out that the right to distribute separate copies of the software is transferred to the other party, but the right to produce additional examples, or copies of the software, is not included (i.e. commercial distribution only). In the same way, the transaction and the payment is not royalty, if the original owner of the copyright hands it over to the other party entirely. In this case, the amount paid in exchange for the copyright cannot be treated as compensation relating to the use of the copyright.

The examples below illustrate situations where the OECD model tax treaty’s definition of royalties applies. The nonresident taxpayer used in the examples does not have a permanent establishment in Finland to which the income would be attributable.

Contracts with mixed elements

If the parties to a commercial agreement have signed a contract with mixed elements, the relevant parts of what is being transferred and how will determine the tax treatment with respect to such an agreement. Each part must be treated separately for tax purposes. For example, some of the related profits may be subject to taxation at source whereas the rest is not. As a result, when assessing the taxes, it is important to identify the different parts. However, in spite of the above, the commercial agreements that have a main element clearly distinct from the other elements of the agreement, the remainder of the agreement being less important or having a supporting role, taxes can be assessed and the tax treaty can be applied in accordance with the main element only.

Know-how

Royalty provisions also apply to the transfer of know-how because it involves intangible assets that are transferred for use. The definition of “know-how”, relating to industrial, commercial or scientific activity, is expertise or knowledge based on earlier experience, which can be utilized so as to receive a financial or economic benefit of some kind. The party that transfers, or gives away, the know-how does not participate in the operation aiming to receive the financial benefits, etc.  In addition, that party does not bear responsibility for the results of the operation.

Services

Royalty provisions do not apply to services because they concern service activities, not the transfer of intangible assets. When one party renders services to another, special knowledge, skills and expertise may be necessary. However, in the case of services, the receiving party does not obtain the knowledge, etc. and is not given the right to make use of such knowledge later. When the contract concerns a sale of services, the end result is the final purpose of the contract: this may be a blueprint, a drawing, an electrical scheme for a building, etc. In addition, the seller of the service is accountable for the end result. This is not the case when know-how is being transferred, because in that case, the party that provided the know-how does not bear responsibility for the results of the operation.

5.2.2 Definitions of royalties deviating from the model tax treaty and their taxation in Finland

The definition of royalties in Finland’s individual tax treaties may be broader than in the OECD model tax treaty and in Finland’s national legislation. If a tax treaty’s royalty article also provides the source state with the right to tax income other than what are considered royalties according to Finland’s national legislation, the income can only be taxed in Finland with the limitations set out in the tax treaty’s royalty article if the income is other taxable income received from Finland for a nonresident taxpayer.

For example, the royalty articles in certain Finland’s tax treaties permit payments made for the use of industrial, commercial or scientific equipment or the right to use such equipment to be taxed in the source state. Here, equipment means tangible assets that are used in industrial, commercial or scientific processes. Income received for leasing tangible assets is not regarded as royalties taxable for nonresident taxpayers in accordance with section 10, paragraph 8 of the Act on Income Tax or other comparable reimbursements (see Supreme Administrative Court 1986-B-II-501). Therefore, even if a tax treaty’s royalty article permits such income to be taxed, Finland as the source state cannot usually tax such income unless it is income received in business activities pursued in Finland in accordance with section 10, paragraph 2 of the Act on Income Tax or the income is attributable to a nonresident taxpayer’s permanent establishment in Finland.

The royalty articles of Finland’s certain tax treaties also include compensation for technical services. In this case, the article in question is usually entitled “Compensation for royalty or fees for technical service”. In these situations, the article includes not only royalties, but also provisions on the taxation of the fees paid for technical services. However, fees paid for technical services are not regarded as royalties taxable for nonresident taxpayers in accordance with section 10, paragraph 8 of the Act on Income Tax or other comparable reimbursements. Therefore, Finland as the source state does not usually have the right to tax such income based on its national legislation, unless it is income received in business activities pursued in Finland in accordance with section 10, paragraph 2 of the Act on Income Tax or the income is attributable to a nonresident taxpayer’s permanent establishment in Finland.

5.2.3 Royalties arising in Finland

When Finland’s tax treaty provides the source state with the right to tax royalty income, it usually also defines when royalties are deemed to have been arisen in Finland.

According to Finland’s tax treaties, royalties are considered to arise in Finland in two different situations. Firstly, royalties are arisen in Finland when they are paid by a person resident in Finland as referred to in the tax treaty. Secondly, royalties are considered to arise in Finland when they are paid by a nonresident corporate entity that has a permanent establishment in Finland. It is usually required that the obligation to pay royalties was incurred in connection with the permanent establishment and such royalties are borne by the permanent establishment.  

As a rule, Finland’s right to tax as the source state is not affected by the simultaneous taxation of the nonresident taxpayer royalties in a third country.

Due to differences in the royalty articles of tax treaties, the point when royalties are deemed to arise in Finland in accordance with the tax treaty must, however, always be verified in the applicable tax treaty.

5.3 Tax exemption of royalty income based on the Interest and Royalties Directive

5.3.1 Requirements for tax exemption

No tax at source is paid on interest and royalty payments between associated companies on the basis of sections 3a–e of the Act on the Taxation of Nonresidents’ Income. The provisions of the Interest and Royalties Directive have been implemented in these sections. In practice, the Interest and Royalties Directive mainly affects taxation on royalty income in Finland, as interest often is not taxable income for nonresident taxpayers (section 9, subsection 2 of the Act on Income Tax).

According to section 3b of the Act on the Taxation of Nonresidents’ Income, royalties within the scope of the Interest and Royalties Directive are tax-exempt when the following requirements are met:

• The beneficial owner of royalties is a company of another EU Member State or a permanent establishment situated in another EU Member State.
• The company, which is the payer or whose permanent establishment is deemed to be the payer of royalties, is an associated company of the company, which is the beneficial owner or whose permanent establishment is deemed to be the beneficial owner of the royalties in question.

An associated relationship is deemed to exist between the royalty payer and the beneficial owner when one of the two companies directly holds at least 25% of the other company’s capital, or a third company directly holds at least 25% of both companies’ capital. Holdings can only apply to companies who reside in the EU area (section 3d of the Act on the Taxation of Nonresidents’ Income).

If the direct recipient of royalty income is not the beneficial owner of the royalties as referred to in the Interest and Royalties Directive, the tax exemption provided in the Interest and Royalties Directive may still be applicable if the direct recipient of the royalties transfers the royalties to the beneficial owner established in the EU area. However, it is required that the beneficial owner can be identified and fulfils all the conditions for the tax exemption of royalties laid down in the Act on the Taxation of Nonresidents’ Income (see joined Cases C-115/16, C-118/16, C-119/16 and C-299/16, N Luxembourg 1 and others).

Tax exemption is not applicable if interest or royalties are paid by or to a permanent establishment situated in a third state of a company of a Member State and if the business of the company is wholly or partly carried on through that permanent establishment (section 3e, subsection 4 of the Act on the Taxation of Nonresidents’ Income).

5.3.2 Royalties within the scope of tax exemption

Royalties within the scope of tax exemption are defined in section 3a, paragraph 2 of the Act on the Taxation of Nonresidents’ Income. According to the provision, royalties mean payments that are received as a consideration:

• for the use of, or the right to use, copyright of literary, artistic or scientific work, including cinematograph films and software,
• for the use of, or the right to use, patent, trademark, design or model, plan, secret formula or process, or
• for information concerning industrial, commercial or scientific experience

In addition, payments for the use of industrial, commercial or scientific equipment, or the right to use such equipment, are regarded as royalties within the scope of tax exemption in accordance with section 3a, paragraph 2 of the Act on the Taxation of Nonresidents’ Income.

5.3.3 A company of an EU Member State and a permanent establishment situated in an EU Member State

A company of an EU Member State means a company that meets the following requirements (section 3c of the Act on the Taxation of Nonresidents’ Income):

• The company takes any of the forms listed in the annex to the directive.
• The company is subject to any of the taxes listed in Article 3, paragraph a(iii) of the directive, without being exempt (primarily corporate tax in the Member State).
• The company, in accordance with the tax laws of a Member State, is a resident in the Member State in question.
• The company is not considered a resident for tax purposes outside the community in accordance with the tax treaty between the Member State and a third country.

A permanent establishment of a company in a Member State situated in another Member State means a fixed place of business situated in a Member State through which the business of a company of another Member State is wholly or partly carried on. (section 3e, subsection 1 of the Act on the Taxation of Nonresidents’ Income).

5.3.4 Beneficial owner

Tax exemption in accordance with the Interest and Royalties Directive always requires that the beneficial owner of royalties is a company of an EU Member State or the permanent establishment of a company of an EU Member State situated in another EU Member State (section 3b of the Act on the Taxation of Nonresidents’ Income). This aims to ensure that the directive only applies to companies residing in the EU (Government proposal 137/2003, p. 4).

A company of an EU Member State as the beneficial owner

When a company of another EU Member State can be regarded as the beneficial owner in accordance with the Interest and Royalties Directive is not defined in the Act on the Taxation of Nonresidents’ Income. According to the definition of Article 1, paragraph 4 of the Interest and Royalties Directive, a company of a Member State is treated as the beneficial owner of interest or royalties only if it receives those payments for its own benefit and not as an intermediary, such as an agent, trustee or authorised signatory, for some other person.

The interpretation of the concept of beneficial owner defined in the Interest and Royalties Directive with regard to companies is discussed in the Court of Justice of European Union’s joined Cases C-115/16, C-118/16, C-119/16 and C-299/16, N Luxembourg and others. In the case, the Court of Justice deemed that the beneficial owner means an entity which actually benefits from the income that is paid to it. According to the Court of Justice, the beneficial owner does not, therefore, mean a formally identified recipient but rather the entity which benefits economically from the income received and accordingly has the power freely to determine the use to which it is put.

When interpreting the concept of beneficial owner defined in the Interest and Royalties Directive, relevant are, according to the Court of Justice, OECD’s 1996 model tax treaty and the successive amendments of that model and of the commentaries relating thereto.

A permanent establishment situated in an EU Member State as the beneficial owner

A separate definition of the beneficial owner concerning a permanent establishment is included in section 3e, subsection 2 of the Act on the Taxation of Nonresidents’ Income. According to the provision, a permanent establishment is regarded as the beneficial owner of interest or royalties if:

1) the debt-claim, right or use of information in respect of which interest or royalty payments arise is effectively connected with that permanent establishment in question; and

2) the interest and royalty payments to the permanent establishment are income subject to the taxes referred to or listed in Article 1, paragraph 5b of the directive as laid down in section 3c in the Member State in which the permanent establishment is situated, or income subject to a tax which is identical or substantially similar and which is imposed after the date of entry into force of the directive in addition to, or in place of, those existing taxes.

Taxes listed in Article 1, paragraph 5b of the directive as laid down in the provision include the taxes of Member States referred to in Article 3, paragraph a(iii) of the directive in addition to the taxes listed separately in the paragraph in question.

If a permanent establishment is regarded as the beneficial owner of royalties, no other part of the company in question can be treated as the beneficial owner (section 3e, subsection 3 of the Act on the Taxation of Nonresidents’ Income).

6 Special circumstances

6.1 Income paid to a foreign partnership

Foreign entities comparable to a domestic business partnership as laid down in section 4 of the Act on Income Tax, such as a limited or general partnership, are regarded as foreign business partnerships.

As a rule, the rate of tax at source withheld on dividends and royalties paid to a foreign partnership is 30% (section 7, subsection 1 of the Act on the Taxation of Nonresidents’ Income). When a partnership receives dividends from nominee registered shares in a Finnish listed company, the payer is obligated to withhold tax at source of 35% when the payer or authorised intermediary does not have the information on the dividend recipient as laid down in section 15e of the Act on Assessment Procedure (section 7, subsection 2 of the Act on the Taxation of Nonresidents’ Income).

If the partnership is separately liable to tax in the country in which it is located, the tax rate pursuant to the dividend or royalty article of the tax treaty between the business partnership’s country of residence and Finland can be applied to the income, provided that other requirements for applying the tax treaty are met.

If the partnership is not separately liable to tax in the country in which it is located, it is not a tax treaty subject, and it does not have the right to enjoy the tax treaty’s tax rate applied to dividends and royalties. However, the partnership’s partners may have the right to enjoy the tax rate pursuant to the dividend or royalty article of the tax treaty between the partners' state of residency and Finland if they are tax treaty subjects and beneficial owners of the income as referred to in the tax treaty (for more information on the requirements for the application of tax treaties, see Section 2.2.2).

A tax at source card can be granted for dividends or royalties received by a foreign partnership from Finland, taking into account the tax treaty’s tax rate, even if the partnership is not separately liable to tax in the country in which it is located. Granting a tax at source card requires that a declaration of the country of residence of the foreign partnership’s partners and their right to the business partnership’s income, as well as them being the beneficial owners of the income as referred to in the tax treaty, is presented in the tax at source card application.

The aforementioned applies to situations where a foreign partnership does not have a permanent establishment in Finland to which dividends or royalties are attributable. If dividends or royalties are attributable to a permanent establishment in Finland, the lower tax rate provided by a tax treaty for dividends or royalties cannot be applied. In this case, taxation on dividends or royalties will be carried out in accordance with the Act on Assessment Procedure in the same way as income received by resident taxpayers. More information on the taxation of a permanent establishment is available in the Finnish Tax Administration’s instructions Income taxation of nonresident foreign corporate entities.

6.2 Special circumstances related to certain natural persons

The tax rates set out in tax treaties may also exceptionally be applicable to Finnish resident taxpayers. The requirement is that the Finnish Tax Administration deems that the country of residence in accordance with the tax treaty between Finland and the person’s country of residence is the other contracting state, not Finland. In such a double residency situation, the tax treaty limits the taxation of resident taxpayers to income which Finland has the right to tax as the source state in accordance with the tax treaty.

A natural person who is a Finnish resident taxpayer can request the Finnish Tax Administration to regard another country as their country of residence as referred to in the tax treaty. More information on making the request is available in the Finnish Tax Administration’s instructions Tax residency, nonresidency and residency in accordance with a tax treaty – natural persons (Section 6.2).

Foreign citizens working for a diplomatic mission in Finland (including their family members) do not pay tax at source on dividends, interest or royalties in Finland (section 12 of the Act on Income Tax). The payer can leave tax at source unwithheld if the income recipient provides a sufficient declaration of their circumstances. More information on this provision is available in the Finnish Tax Administration’s instructions Taxation of employees from other countries (Section 3.9).

6.3 Imposing unwithheld tax on the income recipient

Obligations related to the withholding and payment of tax at source are targeted at the payer. As a rule, the payer is therefore responsible for withholding the correct amount of tax at source (section 8 of the Act on the Taxation of Nonresidents’ Income, and section 9, subsection 1 of the act on tax prepayments (Ennakkoperintälaki 1118/1996)). An authorised intermediary registered in the Finnish Tax Administration’s Register of Authorised Intermediaries can also assume responsibility for ensuring the correctness of tax at source on dividends received by nonresident taxpayers for nominee registered shares in a Finnish listed company (section 10c of the Act on the Taxation of Nonresidents’ Income). In this case, the authorised intermediary is responsible for any taxes remaining unwithheld due to its negligence.

If no negligence on the part of the payer or authorised intermediary has taken place but tax at source has remained unwithheld on dividends, interest or royalties, tax payable on the income will be imposed on the income recipient. The tax will be imposed in accordance with the Act on Assessment Procedure. The Finnish Tax Administration will without undue delay verify the taxpayer’s taxable income and impose tax on it (section 16, subsection 2 of the Act on the Taxation of Nonresidents’ Income). The amount of the tax imposed is the same as in situations where no tax at source was left unwithheld (see Sections 3–5). Nonresident taxpayers must report their income by submitting a tax return or by requesting tax to be imposed. The provisions of the Act on Assessment Procedure on tax adjustments apply to the imposition of tax.

Unwithheld tax can be imposed on the payment recipient, for example, when the recipient has provided the payer or authorised intermediary with incorrect, incomplete or misleading information for the withholding of tax at source, due to which tax at source has remained unwithheld. In this case, no neglect on the part of the payer or authorised intermediary has taken place.

Tax is also imposed on the income earner when the income is made entirely as a non-cash payment and the payer cannot, therefore, withhold tax at source on the payment (section 8 of the Act on the Taxation of Nonresidents’ Income, and section 11, subsection 2 of the act on tax prepayments). Dividends are the most typical instances of non-cash income. More information on the taxation of non-cash dividends and the obligations of dividend recipients is available in the Finnish Tax Administration’s instructions Taxation of non-cash dividends.

7 Tax at source card and advance ruling

The Finnish Tax Administration provides a nonresident taxpayer a tax at source card at request for the application of provisions on tax at source (section 5 of the Act on the Taxation of Nonresidents’ Income). The tax at source card can be requested during the payment year of the dividend, interest or royalty income. The tax at source card must be provided for the payer or authorised intermediary. The payer can withhold the tax at source rate defined in the tax at source card on the income payment date or adjust previously withheld tax at source on the basis of section 10, subsection 2 of the Act on the Taxation of Nonresidents’ Income before paying the excessively withheld tax to the state (quick refund procedure). The tax at source card can be used in situations where the correct tax rate can be determined during the income payment year. More information on the application of the tax at source card to tax at source is available in the Finnish Tax Administration’s instructions Withholding tax at source on dividends, interest and royalties, and the payor’s obligations.

Instructions on how to fill in application forms for the tax at source card are available in the filling instructions for corporate entities and natural persons. The application can be submitted to the Finnish Tax Administration on paper or in electronic format. Instructions on how to submit the application are available in the instructions Applications for tax-at-source refunds and tax-at-source cards.

Taxpayers can request an appealable decision on their tax at source card (section 8 of the Act on the Taxation of Nonresidents’ Income, and section 18, subsection 3 of the act on tax prepayments). An appealable decision can be requested to be adjusted by submitting a written claim for adjustment to the Assessment Adjustment Board within 60 days of the appellant receiving notice of the decision (section 21, subsection 2 of the Act on the Taxation of Nonresidents’ Income, and section 65a of the Act on Assessment Procedure).

Nonresident income recipients and payers can request an advance ruling from the Finnish Tax Administration on how to apply a specific provision of a tax treaty, whether tax at source needs to be withheld or what needs to be otherwise followed in the withholding of tax at source. The application must indicate the question for which an advance ruling is requested and present the information required for settling the matter. An advance ruling issued at the payer’s request must be followed in the withholding of the tax for which it was issued. This is also the case when an advance ruling is issued at the request of a nonresident income recipient if the recipient has demanded the payer to follow the advance ruling (section 12a of the Act on the Taxation of Nonresidents’ Income). More information on applying for an advance ruling is available (in Finnish and Swedish) in the Finnish Tax Administration’s instructions Applying for an advance ruling and the decision issued.

Nonresident income recipients can lodge an appeal regarding an advance ruling issued by the Finnish Tax Administration with the administrative court within 30 days of the appellant receiving notice of the decision (section 21, subsection 2 of the Act on the Taxation of Nonresidents’ Income, and section 85a of the Act on Assessment Procedure).

An advance ruling can also be requested from the Central Tax Board if the matter is significant in principle or the decision on the matter will make the tax practice more harmonised. More information on requesting an advance ruling from the Central Tax Board is available (in Finnish and Swedish) in the instructions Requesting an advance ruling from the Central Tax Board.

8 Tax at source refund application

If the amount of tax at source withheld is higher than what is required by an international convention or if tax has otherwise been withheld incorrectly and the party liable to withhold the tax has not adjusted the withholding, the taxpayer can request tax at source to be refunded by the Finnish Tax Administration. Refund applications must be submitted within three years of the end of the calendar year in which the tax was withheld. Interest is paid on the refunded tax at source (section 11 of the Act on the Taxation of Nonresidents’ Income). The aforementioned adjustment by the party liable to withhold the tax means that the payer adjusts tax at source withheld in accordance with section 10, subsection 2 of the Act on the Taxation of Nonresidents’ Income before paying the excessively withheld tax to the state (quick refund procedure).

The refund application can be used in all situations where a taxpayer deems that the amount of tax at source withheld was too high or incorrect. In addition, cases where the declaration required for taxation can only be provided after the payment year will also always be settled in the refund procedure.

A refund must be requested using a form verified by the Finnish Tax Administration (section 11, subsection 5 of the Act on the Taxation of Nonresidents’ Income). Instructions on how to fill in refund application forms are available in the filling instructions for tax at source refund applications for non-individual applicants and individuals. The application can be submitted to the Finnish Tax Administration on paper or in electronic format. Instructions on how to submit the application are available in the instructions Applications for tax-at-source refunds and tax-at-source cards.

Taxpayers can request decisions on the refund of tax at source to be adjusted by submitting a written appeal for adjustment to the Assessment Adjustment Board. The claim for adjustment must be submitted within 60 days of the appellant receiving notice of the Finnish Tax Administration’s decision (section 21, subsection 2 of the Act on the Taxation of Nonresidents’ Income, and section 65a of the Act on Assessment Procedure).

Forms related to the instructions

• Nonresident’s application for tax at source card, tax card, tax prepayment or tax number
• Foreign corporation’s tax-at-source card application for dividend, interest and royalty income
• Application for refund of Finnish withholding tax – individual
• Application for Refund of Finnish Withholding Tax – Foreign Corporations and Organisations
• Declaration of income for imposing tax at source – natural persons (6220) – vero.fi