Legal Alert – The Finnish Government Counters Hybrid Mismatch Arrangements and Tax Avoidance in Terms of Dividend Taxation
The Finnish government has approved a bill on 1 October 2015 to amend the Finnish Business Income Tax Act by limiting the corporate entities’ right to receive tax-exempt dividends. The bill was presented to Finnish Parliament on 2 October 2015.
The proposed amendments will implement Directives 2015/121/EU and 2014/86/EU into Finnish legislation.
Finnish domestic legislation provides for exemption from income taxation for dividends received by corporate entities from other corporate entities. The scope of exemption has been even more wide-ranging than what is required under the Parent-Subsidiary Directive 2011/96/EU. In addition, the double tax treaties conducted by Finland widely limit Finland’s right to tax any dividend income derived from subsidiaries.
Under the bill, the exemption applied to dividend payments would be limited in future, and the dividends received by corporate entities would be taxable to the recipient if these have been treated as deductible amounts in the distributing entity’s taxation. Whether or not the deduction has actually been taken into account in the distributing entity’s taxation it would have no relevance in the application of the new rules.
In addition, the bill includes a general anti-avoidance provision to prevent the misuse of the participation exemption rules. Under this new rule, any dividends received by corporate entities would be taxable if the payments were part of an arrangement or series of arrangements, the purpose of which is to gain tax benefit. This provision is against the purpose of the general participation exemption rule and applies to arrangements that cannot be considered as genuine arrangements when taking into account all the relevant circumstances. The arrangement would not be treated as a genuine arrangement if it is not based on valid business reasons corresponding to the genuine economic nature of such arrangement.
The proposed amendments will put significant pressure on hybrid mismatch arrangements where the taxation rules of different jurisdictions have not previously been consistent enough. Furthermore, the amendments may have impact on international holding-company structures in general. The wording of the general anti-avoidance rule is rather wide and possibly it will be subject to interpretation in future. The bill also discusses the possibility to overrule certain treaty provisions with this new domestic legislation in order to fight structures where the dividend tax exemption has been applied.
The proposed rules are expected to come into effect from the beginning of 2016.