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Commission refers Finland to the ECJ on Taxation of Dividends

26 Jul 2010

The European Commission has decided to refer Finland to the European Court of Justice because of its failure to comply with a Reasoned Opinion on its legislation - that Finland is being discriminatory against foreign pension funds. The Commission considers the Finnish provisions on taxation of dividends distributed to pension funds as incompatible with the free movement of capital. Taxand Finland discusses this in more detail.

According to Finnish legislation dividends paid by a company resident in Finland for tax purposes to a non-resident pension fund are subject to a withholding tax on gross income at a rate of 19.5%. Finnish pension funds, on the other hand, are taxed under a special regime. 75% of dividend income on investment assets is subject to corporation tax (currently at a tax rate of 26%). However the tax is calculated on net income, ie after deduction of costs as well as current pension liabilities. In practice, the effective tax rate on dividend income paid to a Finnish pension fund is therefore lower than 19.5%.

According to the Commission the difference in treatment between foreign and domestic pension funds amounts to an obstacle to the free movement of capital within the meaning of Articles 63 TFEU and 40 EEA. The difference in treatment constitutes an arbitrary discrimination which cannot be justified on the grounds provided under Article 65 TFEU.

Taxand's Take

In case the Court of Justice confirms the interpretation of the Commission, foreign pension funds may be entitled to tax refunds retroactively. We will wait for the ECJ to reach its conclusion.

Your Taxand contact for further queries is:
Janne Juusela
T. +358 9 6153 3431

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