Legal Alert – US Investment Company Entitled to Dividend Tax Exemption in Finland Based on Free Movement of Capital
On 13 January 2015, the Finnish Supreme Administrative Court (SAC) rendered a precedent on a case concerning dividend paid by a Finnish public limited company to a Delaware Statutory Trust, which is a US-resident registered investment management company and regulated investment company. The Delaware Statutory Trust was a closed-end investment fund which had common shares listed on the New York Stock Exchange. The SAC applied the EU principle of free movement of capital and ruled that the Delaware Statutory Trust is objectively comparable to a Finnish public limited company, and therefore is entitled to tax-exempt dividend from Finnish public limited companies.
It is provided in Article 63(1) of the Treaty on the Functioning of the EU that all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited. Under section 6a of the Finnish Business Income Tax Act, the dividends a Finnish public limited company receives from another Finnish public limited company are tax-exempt. It is also provided in section 3 of the Finnish Income Tax Act that an investment fund could be compared to a corporation. In its decision, the SAC considered the case law of the Court of Justice of the EU concerning free movement of capital and confirmed that different treatment between comparable resident and non-resident public limited companies is in breach of EU law.
It is noteworthy that based on the ruling the tax exemption requires necessary means for exchange of information in the field of taxation exists between Finland and the country of residence of the foreign entity and that the foreign entity provides sufficient information for the comparability analysis.
Based on the ruling foreign investment funds and public limited companies may be entitled to tax refunds for withholding tax levied on Finnish-source dividends. Under Finnish legislation, the withholding tax reclaim has to be filed within five years following the year of relevant dividend payment.