Legal Alert – Amendments To Finnish Corporate Income Taxation and Dividend Taxation as of 2014
The Finnish Government has reached an agreement on central government spending limits for 2014-2017. The Government emphasizes that the solution to the challenges in public finances lies in economic growth and new jobs. The changes decided upon are therefore designated to decrease the tax burden of companies. At the same time, fiscal revenue is to be sought from tightening taxation on profits taken out of the companies, raising taxes on certain excise duties, as well as from abolishing certain tax incentives.
In addition to the changes in the taxation, the Government has also decided on various other significant issues such as guidelines for the continuation of the structural changes regarding the position, obligations and financing of the Finnish municipalities as well as for the provision of the social and healthcare services. In addition, the Government has decided on additional measures aimed at combating economic crime and enhancing competition neutrality between the public and private sectors, and on initiating a reform relating to housing policy – along with many other issues included in the spending limits package. Many of the changes will result in cost savings, but at the same time, additional support measures (targeted e.g. at seed / growth phase companies, companies affected by the future sulphur directive and at promoting education and entry into the labour force) were also decided upon.
These changes are intended to enter into force as of 2014. More detailed information is to be expected by autumn in the form of Government Bills. According to static calculations, these changes might slightly narrow the differences between the levels of income among private individuals. The measures decided upon are planned to turn the increase in the debt ratio into a decline at the end of the electoral term. The amount of the net adjustment is calculated to be approximately EUR 600 million in 2015, and the total net effect, together with the earlier measures by the same Government, is estimated to be roughly EUR 5.2 billion.
The most significant decisions by the Government relate to taxation. The now decided changes in taxation are dealt with below in further detail.
Corporate income tax rate
Based on the decision by the Government, the corporate income tax rate will be lowered to 20% from the current rate of 24.5%. This means a significant change in the level of Finnish corporate taxation. After the drop, the Finnish CIT rate would clearly be below the EU and European average CIT rates.
Broadening of corporate income tax base
The companies will no longer be entitled to deduct representation costs in their income taxation. Currently, 50% of representation costs has been deductible. The change will no doubt emphasize the distinction between representation and marketing/sales/advertising costs.
The recently enacted tax incentives for tax years 2013 to 2015 concerning R&D costs (100% additional deduction of R&D related salary costs within certain limits) and depreciations on productional investments (double maximum depreciations on new buildings, equipment and machinery in productional use) are withdrawn as from 2015.
Furthermore, depreciations on long-term investments will be changed so that they must be made for each item separately (instead of on the aggregate amount of items). In practice, this will often result in increased taxation as the depreciations will be allocated to be made during the entire economic lifetime of each item.
In addition, the already previously enacted restrictions on interest deductions which will enter into force in 2014 should be borne in mind they will form an integral part of the now determined tax package. In accordance with the new restrictions, interest payments between related parties exceeding EUR 500,000/year and 30% of adjusted EBITDA may be subject to the new deduction limitations under certain conditions.
Dividends received from listed companies
85% of dividends received by private individuals from listed companies will be taxed as capital income (at the rate of 30% or 32%, the rate depending on the amount of aggregate taxable capital income). The remaining part of the dividend will be tax-exempt. The tax burden on the individual will thus be 25.5% / 27.2%, and taking into account the CIT, the total tax rate on the profit distributed by a listed company as dividend will be 40.4% / 41.76%.
This change has faced criticism by organizations and persons promoting private investments via stock exchange, as it will clearly tighten the taxation compared to the current situation with 70% of the dividends being taxable. However, as the CIT rate will decrease, the total tax rate will not be affected as much as the taxation on the level of the individual.
Dividends received from unlisted shares
Based on the Governments decision, dividends received by private individuals from other than listed companies may enjoy alleviated taxation depending on the amount of dividend and the net asset value of the distributing company. Only 25% of the dividends from unlisted companies will be taxable as capital income, provided that the dividend does not exceed an amount equal to an 8% annual return on the net asset value of the shares owned (the remaining part being tax-exempt). This alleviated taxation applies to dividend amounts not higher than EUR 150,000. If the dividend exceeds the 8% limit or for the part the dividend exceeds the EUR 150,000 limit, 85% of such dividend is taxable capital income. The tax burden on the individual receiving dividends with alleviated tax will thus be 7.5% / 8% and the total tax rate on the profit distributed as such dividend (taking into account the CIT) will be 26% / 26.4%. The tax burden on dividend amounts not qualifying for the alleviation corresponds to the taxation of dividends from listed companies, i.e. the tax burden on the individual is 25.5% / 27.2% and the total tax rate on the profit distributed as such dividend is 40.4% / 41.76%.
The new dividend tax model is a modification of the current legislation which allows a fully tax-exempt dividend amount of a maximum of EUR 60,000 within a limit of 9% annual return on the net asset value of the shares owned. If the dividend falls within the 9% limit but exceeds the EUR 60,000 limit, 70% of the dividend is taxable as capital income (the remaining part being tax-exempt). Of dividends exceeding the 9% limit, 70% is taxed as earned income (the rest being tax-exempt).
Thus, the change will simplify the situation so that the dividend will not be taxed as earned income in any case. Another change is that no dividend amounts will be fully tax-exempt. Until now, it has been clear that the maximum tax-exempt divi-dends should always be utilized (assuming that the rate on earned income for that person is so high that payment of salary is not the primary way of compensation). In the future, as long as the 8% limit is complied with, dividends up to EUR 150,000 enjoy a significant tax incentive (25% * tax rate 30/32% = 7.5 / 8%).
The agreed changes mean that the difference in treatment of dividends from listed and unlisted companies will remain in force roughly as currently. In both cases taxation will generally be tightened. In the case of unlisted shares, the treatment will nevertheless vary in different situations. As previously, alternative scenarios are many so careful planning and calculations are required e.g. when optimizing how owner-employees should take out profits from their company.
Tax rate on capital income
Even though the tax rates applicable to capital income will remain the same as currently (30% and 32%), the progression limit of the capital income taxation will be lowered to EUR 40,000. In other words, capital income exceeding EUR 40,000 is taxed at 32% instead of 30%, which is applicable to lower amounts. Currently the line is drawn at EUR 50,000. The change will clearly result in tightening of taxation for private individuals.
Deductions by private individuals
The Government decided upon minor adjustments in certain schematic deductions (i.e. increase of työtulovähennys by EUR 30 to EUR 1,000, increase of related accumulation percentage to 7.4, and increase of perusvähennys by EUR 30 to EUR 2,910). Similarly, the possibility to make a deduction for purchased domestic help will be increased by EUR 400 so that the maximum deduction is EUR 2,400. These amendments aim at supporting employment.
Certain excise duties and windfall tax
Excise duties on alcohol, tobacco, sweets and soft drinks will be increased. The exact amounts of increase may still change. It has been presented that the excise duty on alcohol drinks be increased by 15% (10% for beer, cider and similar mild drinks), on tobacco by 10%, on soft drinks by EUR 0.07/litre and on sweets by EUR 0.4/kg (also broadening the tax base for the sweets tax is still being considered). In addition, tax on electricity could be increased by roughly 12%. However, windfall taxation will be decreased compared to the previous plans in order to compensate for the forthcoming sulphur directive.