Finland: Proposed amendment of Tax Act for dividend payments to non-resident pension funds

The Finnish government has presented a proposal to amend the current tax treatment for non-resident pension funds.

Currently, dividend payments paid to pension funds in other European Union (EU) and European Economic Area (EEA) Member States are taxed at 15%, whereas Finnish resident pension funds are eligible to deduct the pension liabilities from their tax base, as cost, which in practice makes the applicable effective tax rate for domestic pension funds lower than the stated 15%.

The proposed Tax Act is based on the EU Court of Justice’s decision against Finland, which concluded that the Finnish legislation is not in line with the principle of free movement of capital within the EU/EEA area. The proposal therefore includes amendments stating that foreign pension funds are comparable to Finnish pension funds and must be treated in a similar way with regard to dividends, provided the following preconditions are met:

• the pension fund is holding the shares as investment assets;
• the pension fund is comparable to Finnish pension funds eligible for the deduction;
• the pension fund is resident in the EEA area or, if the pension fund is resident outside the EEA area, it is required that:
  - the pension fund owns directly less than 10% of the share capital of the company paying the dividends; and
  - the relevant tax domicile country is governed by a treaty on executive assistance and exchange of tax information between the relevant authorities; and
  - Finnish Tax Authorities can obtain the necessary information from the state of residence of the pension funds.

Furthermore, eligible foreign pension funds must provide supporting documentation of the grounds and the amount of the requested deduction. The eligibility of foreign pension funds will be reviewed on a case by case basis by the Finnish Tax Authorities and as a result such reduced rate of withholding tax is only foreseen to be available via standard refund.

The amended Tax Act will, if adopted, enter into force as of 1 January 2015.

We continue to monitor the progress of this proposed amendment and will provide further information when it becomes available.