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Finnish 2012 Tax Reform to Impact MNCs
The 2012 Finnish Budget proposals which were presented to the Parliament by the Government in October 2011 were approved in December 2011 and many of the changes proposed have been in effect from 1 January 2012. From a tax perspective, the emphasis has shifted from work and business towards the taxation of consumption. When it comes to tax rates, the corporate income tax rate has been lowered, whereas the taxation of capital gains and dividends has been tightened. There should not be increases in the taxation of earned income. In addition to wages earned income includes pension income, other taxable welfare benefits, and the proportion of entrepreneurial income defined as earned income. Taxand Finland discusses these changes, their implications on taxpayers, as well as incentives that will benefit multinational companies ("MNCs") with present or future operations in Finland.
The key tax features of the 2012 Budget Bills are as follows:
Corporate tax rate
Effective from 1 January 2012, the corporate tax rate is reduced from 26% to 24.5%. This reduction is a reaction to international tax competition and is aimed at improving growth and investment opportunities in Finland. In addition, the Government is committed to following the corporate tax rate trends in other European countries and is prepared to reduce the rate further if needed to guarantee Finland's competitiveness.
Capital income and dividends
The general capital income tax rate is increased to 30% instead of the former rate of 28% and the tax rate for capital income exceeding EUR 50,000 per year is increased to 32%. Hence the tax rate for capital income includes a progressive component. There is also an increase in the tax rate for substantial inheritances and gifts. The proportion of inheritances and gifts exceeding EUR 200,000 is taxed at a rate of 16% instead of the former third bracket rate of 13%.
While the corporate tax rate has decreased, rules concerning the taxation of dividends have been tightened. The amount of tax-exempt dividends which an individual may receive from a non-listed company is reduced from EUR 90,000 per year to EUR 60,000 per year. As the taxes paid by private individuals on their capital income increases as of 2012, so will the taxes paid by shareholders of non-listed companies with strong balance sheets. Dividends from listed companies received by individuals are directly affected by the increase in the general capital income tax rate as 70% of such dividends are subject to capital income tax.
The changes in the general capital income tax rate also affect the taxation of non-resident companies and individuals as these changes have been taken into consideration in the withholding tax rates.
Value added tax (VAT)
The standard VAT rate remains the same. However, certain specific VAT rates have increased since 1 January 2012. Newspapers and magazines are taxed at a 9% VAT rate instead of the former 0% VAT rate. The VAT rate for certain labour-intensive services such as services of barbers and hairdressers and certain minor repair services has also been increased from 9% to 23% from 1 January 2012 onwards.
Energy taxation has been lowered from 1 January onwards to support companies operating in energy intensive branches. In Finland, energy taxes are levied on electricity, coal, natural gas, fuel peat, tall oil and liquid fuels.
When it comes to Finnish resident companies and their shareholders the emphasis of taxation has shifted from the taxation of corporate profits towards the taxation of funds received from the companies due to the fact that the corporate tax rate has been lowered and the taxation of capital gains and dividends has been tightened.
The difference between the corporate income tax rate of 24.5% and the capital income tax rate of 30% or 32% could create an incentive to incorporate businesses which generate capital income (rental activity, venture capital). By incorporation, such income streams (e.g. rental income) can be changed from capital income to business income and hence be subject to corporate income tax instead of capital income tax.
In addition to the adjustments in tax rates, the Government is also committed to performing an in-depth analysis of the current corporate tax system to potentially reform the system. The Government will also conduct research relating to the possibility of implementing a research and development tax incentive system or a tax incentive system for start-up companies. However, the new incentive system is not likely to be applicable before 2013.
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