Many countries applying imputation systems have introduced various solutions to prevent dividends ultimately received by non-resident shareholders from suffering a corporate income tax burden when the dividends flow through a company residing in a country applying an imputation system.
The objective of the amendments that took effect on 1 January 1995 in Finland was the same as in other imputation countries, i.e. to avoid a Finnish corporate tax burden on dividends that flow through Finland. The reform was intended to enable foreign companies to set up intermediate holding companies in Finland, for example, for the purpose of owning companies in the Baltic countries and Russia.
1.1 Exemption of dividends received from abroad on direct investment
Finnish domestic law was slightly changed at the beginning of 1995 to exempt dividends received on direct investments in Russia. Before 1.1.1995, all dividends from Russia were taxable income for a Finnish resident corporation.
According to the Income Tax Act and the Business Income Tax Act, dividends received from a country with whom Finland had a treaty in force on 1 January 1995 will be exempt provided that a Finnish corporate recipient owns at least 10% of the voting power in the distributing entity or 25% of its capital. Our tax treaties generally exempt dividends if the Finnish resident corporate recipient owns at least 10% of the voting power in the distributing entity. The intention of the Ministry of Finance is to continue this policy. The exemption applies to both passive holding companies and active operating companies.
1.2 Amendment of the imputation system
According to the amended law, dividends flowing through a Finnish intermediate holding company will generally not incur additional income tax if the following requirements are met.
- The recipient of the dividend from the Finnish company is a non resident corporate entity that directly owns at least 25% of the capital in the Finnish company at the end of relevant tax year.
- The recipient is not directly or indirectly controlled by Finnish residents.
- The Finnish distributing company has retained earnings on its balance sheet or its consolidated balance sheet.
It is also required that the Finnish holding company distribute the tax exempt foreign dividends it has received during the tax year immediately when it distributes dividends for the same tax year.
2. Extensive Treaty Network
Finland currently has 51 income tax treaties in force providing for low withholding taxes. Furthermore, Finland abolished withholding tax domestically on dividends payable to EU-resident parent companies at the beginning of this year.
According to law, there is no withholding tax on dividends if the recipient is an entity residing in any of the EU countries and if it directly holds at least 25% of the capital in the paying company. Further, it is required that the recipient not be entitled to an imputation credit on the dividends from Finland and that the recipient be subject to the income tax law of the respective EU country, as specified in article 2 (c) of the parent subsidiary directive (90/435/EU). The law applies to dividends paid on or after 1 January 1995.
3. Gateway position
Finland is the nearest European Union member state to Russian Federation and the Baltic states. It has safe and clean environment and an excellent infrastructure including ship traffic, ports, air transport, railroad services (same rail width as in Russia), highways, telecommunications and skilled labour.
For further information please contact Kirsi Hiltunen, Ernst & Young Tilintarkastajien Oy, Kaivokatu 8, 00100 Helsinki, Finland, tel. +358-0-1727 7220, or fax +358-0-622 1323, or enter a text search 'Ernst & Young' and 'Business Monitor'.
The content of this article is intended to provide general information on the subject matter. It is therefore not a substitute for specialist advice.
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