The Finnish Ministry of Finance has on 15 October 2013 issued a set of proposed rules, which would have a remarkable effect on the taxation of Finnish companies and individuals. The proposed rules are now circulated for statements and subject to public discussion, and the rules would mostly be applicable to fiscal year 2014.
The key points of the suggested rules are discussed below.
General income tax rate and dividend taxation
The bias of the taxation will generally be shifted from the taxation of companies to the profit distribution. In connection with this and as already proposed by Finnish government, the corporate income tax rate would be lowered from 24.5 per cent to 20 per cent. The amendment will apply to fiscal year 2014 with the limitation that should the financial year of a company be extended at or after 21 March 2013 to end in 2014, the tax rate for fiscal year 2014 shall still be 24.5 per cent.
Dividends received by companies were suggested to be renewed. The possibility to receive tax exempt dividends from companies in EU countries would expand, as the exemption would apply to dividends distributed by all such companies tax resident in EEC area which are subject to corporate income tax of at least 10 per cent. On the other hand, dividend distributed by a listed entity becomes fully taxable in the hands of non-listed companies holding less than 10 per cent of the capital in the distributing company, only 75 % of the same dividend being currently taxable. Further, the same would apply as of 2014 to dividend received based on shares belonging to investment assets. Thirdly, the dividend taxation also possibly tightens taxation of dividends distributed by a company tax resident outside EEC area as such dividends become fully taxable in Finland unless an applicable tax treaty limits the taxation of dividend in Finland.
As to taxation of dividends received by individuals, the rules resemble to a large extent rules already presented by Finnish Government. New changes were presented in the form of increasing the tax consequences of hidden profit distribution.
Repatriation of funds from non-restricted equity capital
One of the major systematic changes related to change of repatriation of funds from non-restricted equity capital, which currently decreases the remaining acquisition cost of the shares of the repatriating entity which are treated as capital gain. The situation would change dramatically according to the proposal, as according the main rule, the repatriation would be taxed similarly to dividend income. As an exception, if it could be reliably shown that funds have ended up in the non-restricted equity capital through capital contributions which have taken place less than five years ago and the repatriating entity would be non-listed entity, the repatriation of funds would be treated as decreasing the acquisition cost of the shares. Even if the exception was applied, the acquisition cost would only be decreased with the relative part of the repatriated funds of the mathematic value of the shares, or the remaining acquisition cost if that would be smaller than the relative amount. The exception would not apply to repatriation of funds by listed companies. Further, repatriations of funds to foreign shareholders would become subject to Finnish dividend WHT.
The structured model creates need for evaluation of repatriation of funds already during this year.
Amendments concerning cooperatives
The taxation of cooperatives would be, according to the suggestion, amended as regards the deductibility of refund of excess funds. For other than “traditional cooperatives” the refund would become non-deductible in taxation, to ensure the neutrality of company forms. Even for traditional cooperatives the tax-deductible excess would be limited to the part of excess which is created in the trade between members of the cooperatives and the cooperative.
Further, the benefit from consumption cooperatives will become taxable more often as individual’s annual tax exempt part concerning income from cooperative is lowered from EUR 1.500 to EUR 100. The excess would be, similarly as in current legislation, taxed similarly to dividend income from listed companies. Profits from other than consumption cooperatives would be taxed similarly to dividends from unlisted companies.
Similar principles would apply to excess funds distributed by a cooperative to a company. Excess which is non-deductible to the cooperative is taxed similarly to dividend from an unlisted entity, whereas deductible excess is fully taxable income.
Changes in depreciation methods of long-term assets
Currently, fixed assets having long life time can in Finland normally be depreciated with declining balance method from the aggregate amount of items. However, the regulation would change in relation to assets with a life time of over 10 years, which would as of the fiscal year 2014 be depreciated with straight line depreciations determined for each of such assets separately. The rule would apply to assets that are acquired during fiscal year 2014. Additionally, a replacement reserve system would be expanded to cover certain disposals of such assets.
The interest deduction limitation rules will be slightly tightened, as the EBITDA limit determining deductible intra-group interest will be lowered from 30 % to 25 %. Further, by contrast to what was proposed before, losses and changes in value of financial assets are not decreased from taxable EBITDA.
Further, as discussed already before in public, tax incentives concerning both depreciations on certain production-related investments and qualified R&D costs would be withdrawn as from 2015.