Legal Alerts/19 Nov 2012

Legal Alert – The Finnish Dividend Taxation Is in Breach of the Free Movement of Capital

The Court of Justice of the European Union has rendered a judgment in a case concerning Finnish taxation of dividends paid to foreign pension funds (Commission v Finland, C-342/10). According to the judgment Finland has breached free movement of capital by introducing and maintaining in force a scheme under which dividends paid to foreign pension funds are taxed in a discriminatory manner in comparison with Finnish pension funds.

According to Finnish tax legislation dividends received by a domestic pension fund are, in principle, taxed at an effective rate of 19.5 %. Dividends received by a non-resident pension fund are subject to a rate of tax of at least 15 % in accordance with the double taxation conventions or a rate of tax of 19.5 % in accordance with national tax legislation.

However, the Finnish pension funds are in effect authorised to deduct the amounts reserved in order to meet their obligations as regards pensions, which, in fact, gives rise to a tax exemption for those dividends. Foreign pension funds are taxed without the possibility of their being granted the right to deduct tax from the amounts in reserve before taxing the Finnish-source dividend in Finland.

The Commission had taken the view that the Finnish tax scheme was discriminatory as regards the dividends paid to non-resident pension funds. The Court of Justice agreed and it did not accept justifications based on the principal of territoriality or cohesion. Furthermore, the Court of Justice found that the double tax conventions concluded by Finland did not offset the unfavourable treatment of foreign pension funds.

Consistent with the recent Santander case (Joined Cases C-338/11 to C-347/11), the Court of Justice continues to build a coherent case law in regard to Member States’ discriminatory tax legislation. In accordance with the objectives of the European Union, the Member States’ attempts to justify their discriminatory tax legislation by an overriding reason of public interest are being interpreted restrictively.

As a result of the judgment C-342/10, foreign pension funds might be entitled to reclaim the withholding taxes levied by the Finnish tax authority.

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Additional information

Einari Karhu