General
The most significant changes in the Finnish tax system in the past ten years became effective on 1 January 2005. First, the imputation credit system (avoir fiscal) was abolished and replaced by a partial double taxation of distributed profits. Further, the corporate tax was reduced and the capital gains on disposals of shares for corporate entities were exempted with certain qualifications. The following summarises the changes in respect of corporate taxation and dividend taxation where a company is receiving dividends.
New corporate tax rate
Characteristic features of the Finnish corporate taxation include a broad tax base and relatively low nominal tax rates. This will continue. The corporate income tax rate was reduced to 26% as of 1 January 2005.
Tax exemption of share disposal for corporate entities
Capital gains based on the disposal of shares in a limited liability company will be tax exempt for corporate entities provided that the vendor company has owned at least 10% of the subsidiary’s share capital and the disposed shares for at least one year and the shares belong to the vendor’s fixed assets. Losses, including liquidation losses, relating to disposals of shares entitled to the tax exemption, will not be tax deductible. The tax exemption is not applied to equity investors, nor to disposals of Finnish housing companies, real estate companies, mutual real estate companies or other companies, the activities of which mostly consist of owning or managing real property.
The tax exemption requires (i) that the disposed company is either a Finnish company or a company described in the Parent-Subsidiary Directive or (ii) that a tax treaty exists between Finland and the disposed company’s resident state, which treaty is applied to the company’s dividend distributions.
As regards disposals of shares belonging to the vendor’s fixed assets to which tax exemption is not applied to, capital losses are deductible from capital gains with a loss carry forward period of five years. However, capital gains received from vendor’s current, financial and investment assets will continue to be taxable income and corresponding losses will be deductible from normal business income with a loss carry forward of ten years as before.
These rules are applied to disposals taking place on 19 May 2004 or thereafter.
Changes to dividend taxation of corporate entities
As a main rule, dividends received by corporate entities are not taxable income. However, 75% of dividends received from shares included in the recipient company’s investment assets will be taxable income. This will apply equally to domestic and foreign entities unless the distributing company is an entity to which the Parent- Subsidiary Directive applies and of whose share capital the recipient company owns directly at least 10%. Under the transitional rules, only 60% of the dividends are taxable income in 2005.
Additionally, dividends will be taxable income if the distributing company is not an entity resident in the European Union. If this is the case, the availability of a tax exemption will in most cases in practice be established on the basis of relevant Finnish tax treaty. Further, dividends received in respect of shares in a listed company included in other assets than investment assets of the recipient company, will be taxable income if the recipient company is neither a listed company nor owns at least 10% of the distributing company‘s share capital. If this requirement is not met, 75% of the dividend is taxable income. The balance (25%) is tax exempt. Under the transitional rules, only 60% of the dividends is taxable income in 2005.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.