Assessment of taxes that are contrary to the provisions of the tax treaty

The tax authorities of the country of source may have moved away from the provisions of the tax treaty with Finland, burdening your income with taxes that are not in line with the treaty.  If this has happened, you as the taxpayer will need to turn to the authorities of that country to ask for adjustment or refund.  If your foreign-sourced income has consisted of dividends, interest or royalties, you will be eligible to refunds of any excessively paid taxes if you give more information of your actual circumstances either to your payer or to the foreign tax authorities of the country where the income is sourced.  Similarly, it is usually easy to obtain a refund in other comparable situations where the authorities have deviated from the tax treaty as the result of a misunderstanding or too little information.

Excess tax on dividend, interest or royalty income

Most countries have a 25%–30% withholding rate on dividend, interest and royalty paid out to a nonresident beneficiary. However, international tax treaties often prescribe a lower rate, such as 15%, to be withheld from residents of the other treaty country. The taxpayer must give evidence in the source country that he is entitled to the benefits of the tax treaty, otherwise the payer will normally be compelled to withhold tax at the full rate. If the evidence is sufficient, in some countries the payer can directly implement the lower rate in the tax treaty. But very often, when making a payment, the payer always has to use the higher withholding rate, and the taxpayer must afterwards submit an application for tax refund. Special forms are normally provided in the source country for making these applications.

Example: Maria is a Finnish tax resident.  She had to pay 28% tax at source in Denmark on dividends from a Danish company, even though the tax treaty only prescribes 15% tax. For instructions as to how the matter can be put right, Maria can contact the Danish payer of dividend or the tax administration of Denmark.  Maria can also go to the Nordisk e-tax Website at www.nordisketax.net to examine Danish guidelines regarding refunds of excess tax on dividends.

Taxpayers must normally enclose a Certificate of Tax Residence with the application letter when requesting a refund from the source country. Finnish residents can obtain the certificate from the local tax office in Finland. 

Excess tax on other types of income

Similarly, wage income can sometimes be taxed in the source country in a manner contrary to the tax treaty.  In most cases this is due to lack of necessary information on the employer’s part regarding facts and circumstances.  Any excess amounts of tax are normally refunded if the taxpayer submits more information to either the employer or to the foreign tax authority.

Example: Antti is a Finnish resident.  He has worked for a Swedish university as a researcher for 9 months, of which 5 months were in Finland and 4 months in Sweden. The salary for 9 months was taxed in Sweden even though the tax treaty only allows Swedish tax on salary earned when working in Sweden (the 4-month period).  Antti should contact the Swedish university and explain that part of the work was done in Finland.  The university may be unable to refund the excess tax withheld, but can probably give instructions on how to proceed.  If necessary, Antti can also contact Skatteverket – the Swedish Tax Agency.

Where appeals in the source country have not brought results

Sometimes the matter remains unresolved in the source country even after appeal.  Necessary information may not have been obtained, or tax authorities in the source country may have interpreted certain income types differently from the Finnish authorities.

If the appeal in the source country fails to bring results, the Finnish taxpayer should contact the local tax office in Finland.  The Finnish Tax Administration can examine the legal reasoning in the decision given in the source country. If the Finnish tax authorities find the reasoning acceptable, they may reassess the Finnish taxes and eliminate the double taxation.

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Exceptional situations may require a special procedure

Finland’s tax treaties also contain a provision concerning the mutual agreement procedure.  In special circumstances, the competent authorities in both countries (normally the ministry of finance or the tax administration) can negotiate (usually by correspondence) in order to eliminate double taxation or taxation contrary to the treaty. The result of such negotiations may be that one or other country, or both, will forgo their tax, either wholly or in part.  However, it should be noted that the countries do not have a binding obligation to do so.  If the taxpayer has made an application to an appeal authority, Finland will only start negotiations after the authority has given its decision on the appeal.

In a mutual agreement procedure, the tax authorities of both countries will exchange opinions by correspondence and attempt to find a solution to a specific tax issue.  The correspondence may span several years, and the final outcome may simply be a recommendation to the taxpayer to submit an appeal or an application for tax refund to the source state.  This means that the mutual agreement procedure cannot be regarded as a primary tool for achieving better results than the normal refund applications or requests for correction submitted by the taxpayer.  Instead, the mutual agreement procedure will typically only be practicable in situations where the other country has been unable to implement a tax adjustment even after an appeal.

Request for mutual agreement procedure from the Finnish Tax Administration

A taxpayer resident in Finland can request the use of a mutual agreement procedure. Such a request is made by sending a free-form letter to the Finnish Tax Administration. The title of the letter should be "Request for commencement of mutual agreement procedure under tax agreement".

Some tax agreements require that the request be made within a specific time limit. If the competent authority is the Ministry of Finance, the Tax Administration will transfer the matter to the Ministry. Before presenting an official request, the taxpayer should contact the Tax Administration and determine whether using the mutual agreement procedure is possible.

Sometimes it is clear that the other state has the right to collect the taxes. Notwithstanding this, the taxpayer may be dissatisfied due, for example, to the other state not having approved certain deductions. In such a case, the question is not whether taxes have been collected against the terms of agreement, but whether the taxes were collected correctly in accordance with the other state's tax laws. These types of situations are not dealt with via a mutual agreement procedure.

Before making a request for a mutual agreement procedure, the person or company should discuss the applicability of the mutual agreement procedure to their situation with a competent authority, i.e., the Tax Administration or the Ministry of Finance. The Tax Administration will provide advice and guidance on selecting the right procedure.

Ask more about the agreement procedure at 029 497 024 (International income taxation of individuals) or send us the contact request below:

Contact request in a mutual agreement procedure

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