Legal Alert – Changes to Taxation of Cooperatives
On 15 September, the Finnish Government released a proposal to amend the taxation of cooperatives (Government Bill 130/2014). In general, the amendments would bring the taxation of cooperatives closer to the taxation of corporations. The purpose of said amendment is to direct the focus of taxation of cooperatives (Finnish: osuuskunta) from taxation of surplus within the cooperative to the distribution of the surplus to cooperative’s members.
The need for change related to the fear that in connection with introduction of the new Cooperative Act, resembling the Finnish Companies Act, unbeneficial tax avoidance and planning situations would arise.
Taxation of the recipient
Primarily, according to the proposal, the repatriation of surplus from a cooperative would be fully or partially taxable if the recipient is not a corporation.
The proposal would differentiate between surplus retained from a publicly listed cooperative and surplus received from a non-listed cooperative. In case of a publicly listed cooperative, 85 % of the income received would be taxable as capital gains if received by a natural person, i.e. the treatment would not differ from income received from a publicly listed corporation. If a natural person receives said surplus from other than a publicly listed cooperative, 25 % of said income would be taxable capital gains and 75 % would be tax exempt up to 2 500 EUR annual amount. Above this threshold, 85 % would be taxable capital gains and 15 % tax exempt income. In cases of small cooperatives – under 500 persons – paying a relatively high rate of return, exceeding 8 %, said surplus may also be taxed as earned income of its recipient.
Distribution of funds from the non-tied equity under the Cooperatives Act would be taxed primarily as repatriation of surplus, apart from situations specifically stipulated by law. In some instances, the distribution could also be taxed as transfer between parties.
Surplus received by a corporation would usually be tax exempt.
Deductibility of surplus
According to the proposal, in future, the cooperative could deduct any surplus repatriation only under specific circumstances. Generally, it would be limited only to cooperatives, the actions of which consist of supporting the agriculture or business of their members; whereas cooperatives for consumption purposes would not be within the scope of the proposed regulation.
Further, the possibility to deduct surplus would require that the recipient was an open member of the cooperative. In addition, surplus deducted shall be taxable income of its recipient.
Cooperatives are currently used primarily economically for small-scale business operations to meet the needs of their members. However, also a number of larger cooperatives exist. In 2012, cooperatives paid a total of 230 MEUR in interest payments on cooperative capital; over half of said interest, ca. 134 MEUR, was paid to legal persons formed in corporate type. In taxation, cooperatives have deducted during the years 2010-2012 ca. 23-35 MEUR worth of repatriation of surplus funds.
The Government Bill still awaits parliamentary discussion and review. It is proposed to be handled in connection with the budget proposal for the year 2015.