Legislative changes concerning nominee-registered securities will lead to fundamental changes to the taxation procedure of Finnish-sourced dividends paid for nominee-registered securities. Abolishing the currently applicable so-called simplified procedure means that, in many situations, dividends that were previously subject to a withholding tax (“WHT”) rate of 15 per cent may now become subject to a WHT rate of 35 per cent in Finland. It is expected that, as from 2021, this change will increase both the importance and the number of WHT reclaim processes in Finland.
Procedure that currently applies to dividends paid for nominee-registered securities
Pursuant to the rules that currently apply, Finnish-sourced dividend payments for nominee-registered shares are entitled to a treaty-based withholding tax rate ̶ usually 15 per cent ̶ on the basis of the so-called simplified procedure. As a result of this procedure, the treaty-based WHT rate can be applied at source if certain conditions established in the Finnish Withholding Tax Act are met. In practice, WHT treatment is based on the dividend recipient’s country of residence, and no information on the identity of the dividend recipient is provided to the Finnish Tax Administration if this information is not requested separately.
Key changes to taxation of Finnish-sourced dividends paid for nominee-registered securities
The key amendment is that the current simplified procedure will be abolished. Under the new rules, the treaty-based WHT rate will not apply if detailed information on the dividend recipient is not submitted to the Finnish Tax Administration either in connection with the dividend payment or later in the annual information return. If the aforementioned information regarding the final recipient is not provided, Finnish-source dividend payments for nominee-registered shares will become subject to a WHT rate of 35 per cent at source. This amendment primarily affects foreign shareholders who own nominee-registered securities in Finnish listed companies.
The new legislation will apply to dividends paid on 1 January 2021 or afterwards.
Under the new legislation, the current foreign custodian (intermediary) register will be closed and replaced with the new Register of Authorised Intermediaries that will be launched on 1 January 2021. The new legislation will also lead to changes in the obligations and liabilities of foreign custodian banks and other intermediaries.
Another change that will result from the new legislation is that Finnish-sourced dividend payments for nominee-registered securities held by Finnish residents will become subject to a WHT rate of 50 per cent. This rule, applicable as from 1 January 2020, is meant to prevent situations where Finnish residents would try to avoid taxation in Finland by using nominee-registered securities.
What will this change mean in practice?
When taking into consideration that Finnish-sourced dividend payments for nominee-registered securities are currently often subject to a WHT rate of 15 per cent at source, this change means that, in many cases, the WHT rate will be increased by 20 percentage points.
Due to the change shifting more responsibility for ensuring correct WHT treatment from Finnish payer companies to registered custodians, it is also expected that, in many situations, custodians will mitigate their own risks by withholding the maximum amount of WHT (35 per cent) at source instead of applying the lower treaty-based rate. The claim for the refund of excess WHT can then be filed to the Finnish Tax Administration. As a result, it is expected that as from 2021, the importance of WHT reclaim processes – as well as the number of pending WHT reclaims at the Finnish Tax Administration – will increase significantly in Finland.
Currently, there are many open questions related to the application of the new taxation procedure. More detailed guidance on this matter is expected to be published by the Finnish Tax Administration at the beginning of 2020.
For a more detailed discussion on this topic, please read this article by Anna Tallgren and Janne Juusela published in International Tax News.
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