Legal Alerts/26 May 2016

Legal Alert – Finnish Taxation of Dividends Received by a Non-Resident Life Insurance Company Was in Breach of the Free Movement of Capital

The Finnish Supreme Administrative Court on 23 May 2016 issued a ruling regarding withholding taxation of dividend income (KHO 2016:77). The dividend income distributed by Finnish listed companies was received by a Luxembourgian life insurance company. The dividend income was subject to a withholding tax of 15%. In its ruling, the Court found that levying withholding tax on dividend income of a non-resident life insurance company was in breach of the free movement of capital.

According to Finnish legislation, the appreciation of and income from a unit-linked policy is taxable income of a resident life insurance company. However, resident life insurance companies are in reality entitled to deduct the dividend income of unit-linked policies as the corresponding increases in their technical reserves are tax deductible.

Dividend income received from Finnish listed companies by a Luxembourgian life insurance company is taxable income under the Luxembourgian law. The company is obliged to hold a statutory technical reserve to cover future liabilities, and this reserve is deductible in taxation. As the technical reserve increases with the amount of dividend income included in it, the dividend income becomes in effect tax neutral – as is the situation also in Finland for Finnish life insurance companies. However, due to the fact that withholding tax levied on the dividend income from Finnish listed companies was not deductible in taxation, the tax burden in this case was in reality higher for the Luxembourgian company compared to the one of its Finnish rivals.

Heavier tax burden for non-resident companies was in breach of EU law

Under these circumstances the Court concluded, amongst other things, that due to the provision of free movement of capital, the taxation of dividend income received by the unit-linked policy of a non-resident life insurance company from Finnish listed companies should not burden the non-resident life insurance company any more than a resident company. Therefore the levying of the withholding tax was in breach of EU law.

In light of this ruling and based on the withholding tax relief, EU resident life insurance companies may be entitled to dividend withholding tax refunds from the Finnish tax authorities. We are happy to discuss the impact of the ruling on your business should you have further questions.

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Additional information

Heikki Wahlroos