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Finnish corporate income tax & dividend tax amended to enhance appeal

Finland
The Finnish government has now reached an agreement on central government spending for 2014-2017. The changes are designed to decrease the tax burden of companies, while generating fiscal revenue from an increased taxation on dividends, eliminating certain tax incentives and changes on certain excise duties. These changes are intended to enter into force as of 2014; more detailed information is expected by autumn in the form of Government Bills. Taxand Finland explains the legislative changes agreed by the Finnish government and the consequences for MNCs.

The most significant decision made by the Finnish government relates to corporate income taxation. The corporate income tax (CIT) rate will be lowered to 20% from the current rate of 24.5% making the Finnish CIT rate below the European average. However, companies will no longer be entitled to deduct representation costs in their income tax return. This change is in addition to the previously enacted restrictions on interest deductions which will enter into force in 2014 which form an integral part of the now determined tax package. In accordance with the new restrictions, interest payments between related parties exceeding EUR 500,000/year and 30% of adjusted EBITDA (ie taxable business profits adjusted with the aggregate amount of interest costs, depreciations, losses and change in value of financial assets and group contributions received, deducted with the amount of group contributions paid), may be subject to the new deduction limitations under certain conditions.

The recently enacted tax incentives for tax years 2013 to 2015 concerning the deductions for R&D costs and depreciation on production investments (double maximum depreciations on new buildings, equipment and machinery in productional use) have been withdrawn as of 2015. Furthermore, depreciations on long-term investments will be changed so that they must be made for each item separately (instead of on the aggregate amount of items). In practice, this will often result in increased taxation as the depreciations will be allocated to be enacted throughout the economic lifetime of each item. The taxation of dividends received by individuals will also change. Consequently, 85% of dividends received by private individuals from listed companies will be taxed as capital income (at the rate of 30% or 32%, depending on the amount of aggregate taxable capital income). The tax burden on the individual will thus be 25.5% / 27.2%, and taking into account the CIT, the total tax rate on the profit distributed by a listed company as dividend will be 40.4% / 41.76%.  

Moreover, dividends received by private individuals from non-listed companies may enjoy a taxation relief depending on the dividend amount and the net asset value of the distributing company. Only 25% of the dividends from unlisted companies will be taxable as capital income, provided that the dividend does not exceed an amount equal to an 8% annual return on the net asset value of the shares owned (the remaining part being tax-exempt). This alleviated taxation applies to dividends of less than EUR 150,000. 

No dividend will therefore be fully tax-exempt. Until now, the maximum tax-exempt dividends should always be utilised (assuming that the rate on earned income for that person is so high that payment of salary is not the primary means of compensation. Per the new legislation, as long as the 8% limit is complied with, dividends up to EUR 150,000 enjoy a significant tax incentive (25% * tax rate 30 / 32% = 7.5 / 8%). 

Even though the capital income tax rates will remain as currently (30% and 32%), the progression limit of the capital income taxation will be lowered to EUR 40,000 from the current EUR 50,000. 

Excise duties on alcohol, tobacco, sweets and soft drinks will also be increased although the exact increase is not final. 


Your Taxand contact for further queries is:
Janne Juusela
T. +358 9 6153 3431
E. janne.juusela@borenius.com

Taxand's Take

The changes introduced above should be taken into account when conducting business in Finland. The changes will lower the corporate income tax rate, broaden corporate income tax base and alter the taxation of dividends. These changes are intended to enter into force as of 2014 with more detailed information expected by autumn. Now is the time to review the Finnish tax structure and plan accordingly. 

Taxand's Take Author

Janne Juusela
Finland

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