Legal Alerts/4 Apr 2012

Legal Alert – Refund of Finnish withholding tax to foreign investment funds

The Administrative Court of Helsinki has recently issued decisions which grant refund of Finnish withholding tax on dividends to Swedish tax-exempt investment funds on the basis of EU arguments. The State Representatives have decided not the appeal the decisions and therefore the decisions have gained legal force.  Attorneys at law Borenius represented the Swedish investment funds in the process.

Finnish investment funds qualify as separately taxable corporate entities for Finnish tax purposes. Based on a special provision of the Income Tax Act, investment funds are fully tax-exempt entities. In principle, non-resident investment funds are nevertheless subject to withholding tax on Finnish-source dividends. Provided that the non-resident fund is tax-exempt in the country of residence, the Finnish withholding tax remains as a final tax burden. Therefore the difference in tax treatment compared to a Finnish investment fund investing in the same companies is evident.

In its rulings the Administrative Court stated that the difference in tax treatment was not justified and therefore the Swedish investment funds should have been entitled to tax refunds. The Court justified its rulings with the established legal practice of the European Court of Justice concerning dividend withholding taxation within EU. In addition the Court ruled the State to compensate legal costs to the Swedish investment funds.

The rulings strengthen the general consent on interpretation of EU law on withholding taxes. In addition the rulings could encourage other foreign investment and pension funds to claim for tax refunds from Finland. Foreign investment funds should claim for refunds for dividend withholding taxes within five calendar years following the year during which the withholding tax was levied. Currently, withholding taxes levied in 2007-2012 are subject to reclaims.

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Einari Karhu