Legal Alert – Final Government Proposal Released Introducing Changes to Finnish Taxation as of 2014
The Finnish Government released the final proposal introducing remarkable changes to the taxation of Finnish companies and individuals on 13 November 2013. As a result of the feedback received during the consultation stage of the draft proposal issued on 15 October 2013 (see legal alert), the draft proposal was revised to a certain extent. As one significant difference, the changes proposed to depreciations of long-term assets were withdrawn from the final proposal. The proposed rules are subject to the Finnish Parliaments approval and they will mostly be applicable as of fiscal year 2014.
The key points of the suggested rules are discussed below.
General income tax rate and dividend taxation
The bias of the taxation will generally be shifted from the taxation of companies to the profit distribution. In connection with this, the corporate income tax rate will be lowered from 24.5% to 20%. The amendment will apply to fiscal year 2014 with the limitation that should the financial year of a company be extended at or after 21 March 2013 to end in 2014, the tax rate for fiscal year 2014 shall still be 24.5%.
Taxation of dividends received by companies was suggested to be renewed. The possibility to receive tax exempt dividends from companies in the EU countries would expand, as the exemption would apply to dividends distributed by all such companies tax resident in the EEC area which are subject to corporate income tax of at least 10%. On the other hand, dividend distributed by a listed entity becomes fully taxable in the hands of non-listed companies holding less than 10% of the capital in the distributing company, only 75% of the same dividend being currently taxable. Thirdly, the dividend taxation also possibly tightens taxation of dividends distributed by a company tax resident outside the EEC area as such dividends become fully taxable in Finland unless an applicable tax treaty limits the taxation of dividend in Finland.
As a difference to the draft proposal, the taxable part of a dividend received based on the shares belonging to investment assets of financial, insurance or pension institutions would remain as 75%.
As to taxation of dividends received by individuals, the rules resemble to a large extent rules already presented by the Finnish Government (see legal alert). Changes were also presented in the form of increasing the tax consequences of hidden profit distribution.
Repatriation of funds from non-restricted equity capital
One of the major systematic changes related to change of repatriation of funds from non-restricted equity capital, which currently decreases the remaining acquisition cost of the shares of the repatriating entity and is treated as capital gain. The situation will substantially change, as according to the proposed main rule, the repatriation would be taxed similarly to dividend income.
As an exception, if it could be reliably shown that funds have ended up in the non-restricted equity capital through capital contributions which have taken place less than ten years ago and the repatriating entity would be a non-listed entity, the repatriation of funds would be treated as decreasing the acquisition cost of the shares in the same way as before. The exception would not apply to repatriation of funds by listed companies. Further, repatriations of funds to foreign shareholders would become subject to Finnish dividend WHT.
Compared with the draft proposal, changes have been made with regard to the time limit set for the contribution and the deductible amount of acquisition cost.
The regulation would start to apply immediately to capital contributions made as of 1 January 2014. Further, the new regulation would be applied to repatriations of capital contributions made prior to 1 January 2014 if the repatriation is made on 1 January 2016 or after that.
Amendments concerning cooperatives
The taxation of cooperatives would be, according to the suggestion, amended as regards the deductibility of refund of excess funds. The excess tax-deductible for cooperatives would be limited to the part of excess which is created in the trade between members of the cooperatives and the cooperative.
As a difference to the draft proposal, the final proposal does not suggest any changes to the taxation of cooperative members. However, the proposal states that a separate proposal on the subject will be issued later on.
The interest deduction limitation rules will be slightly tightened, as the EBITDA limit determining deductible intra-group interest will be lowered from 30% to 25%. Losses and changes in value of financial assets are not decreased from taxable EBITDA.
Further, tax incentives concerning both depreciations on certain production-related investments and qualified R&D costs would be withdrawn as from 2015.