Tax treatment of debt and equity financing in Finland
| Author | Tomi Viitala |
| Pages | 1-14 |
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1.1.1. The taxation of dividends1 depends on whether the recipient is an individual or a company and whether the distributing company is publicly listed or not.
1.1.2. For individual shareholders 70% of dividend from publicly listed companies is taxed as investment income at a flat rate of 28% and 30% is tax exempt.
1.1.3. If the distributing company is not listed more complicate rules apply. An annual return of 9% is calculated on the value of the shares in a non-listed company. The dividend is fully tax exempt up to an amount of 90,000€ of such return. The amount of such dividend that exceeds 90,000€ is taxed by applying 70/30% rule, so that 70% of the dividend is taxed as investment income at a rate of 28% and 30% is tax exempt. The amount that exceeds the 9% is also taxed by applying 70/30%, so that 70% is taxed as earned income subject to progressive income tax rates and 30% is tax exempt.
1.1.4. Dividends received from a non-resident company is taxed in the same way as domestic dividend provided that the distributing company is aPage 2 company within the meaning of the EU Parent–Subsidiary Directive2 or there is in that tax year in force a tax treaty between Finland and the country of residence of the distributing company which is applied to the dividend distributed by that company.3
1.1.5. Dividends paid between domestic companies are as a general rule tax exempt. There are some exceptions to this rule. First 75% of a dividend received by financial, insurance or pension institutions is taxable at the corporate tax rate of 26%. Second, 75% of a dividend is taxable where the distributing company is a publicly listed company but the recipient company is a non-listed company which does not hold directly at least 10% of the share capital of the distributing company. Dividends received from companies resident in the EU are treated in the same way as dividends from Finnish companies.
1.1.6. Dividends received from companies resident in a country with which Finland has concluded a double taxation agreement are treated as 75% taxable income subject to the corporate tax rate of 26%. If no double taxation agreement is applicable or exists, dividend is fully taxable at 26%.
1.1.7. It should also be noted that Finland’s double taxation agreements often include unilateral exemption of dividends in the case that the Finnish company holds at least 10% participation in the voting power of the distributing company.
1.1.8. Capital gains on the sale of shares are generally taxable income. However, for limited companies (osakeyhtiö) capital gains are tax exempt provided that shares are part of the fixed assets and the seller has hold at least 10% of the capital of the company whose shares are sold for at least one year. The exemption does not apply to the shares of real estatePage 3 companies. A loss incurred on the sale of shares is not deductible if a gain on the sale of such shares would have been tax exempt.
1.1.9. For individuals the taxable capital gain is calculated by deducting the acquisition costs and sales costs from the sales price. A minimum deduction of 20% of the sales price is applied. If the property has been held for at least ten years, the minimum deduction is 40%. Losses are deductible only from capital gains within the same and following three years (from 2010 extended to five years).
1.2.1. Dividends are as a rule subject to 28% withholding tax but several exemptions apply.
1.2.2. First under the EU Parent-Subsidiary Directive4 an EU resident company having a holding of at least 10% in the capital of the Finnish distributing company is exempt from dividend withholding tax.
1.2.3. Second, companies resident in the EU and EEA member states qualify for the same tax exemptions as Finnish companies provided that there is an information exchange agreement between Finland and the residence state of the recipient and proof that withholding tax cannot be credited in that state if levied in Finland.
1.2.4. Third individuals resident in the EU or EEA member states may apply the same taxing rules as Finnish resident individuals provided that there is an information exchange agreement between Finland and the residence state of the recipient and proof that withholding tax cannot be credited in that state if levied in Finland. There is an information exchange agreement with all EU and EEA member states with the exception of Liechtenstein.
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1.2.5. It should also be noted that Finland’s double taxation agreements often limit the applicable withholding tax on dividends to a maximum of 0-15% in the case of portfolio dividends and 0-5% in the case of direct dividends.
1.2.6. Capital gains on the sale of shares in Finnish companies are not considered taxable income for non-residents. Exceptions may apply in the case of shares in real estate companies.
1.3.1. Paid dividends are not deductible for the distributing company. Effective from 1.1.2010 there is an exemption to this rule but it is not relevant for the purposes of this article.
2.1.1. Interest on debt incurred for the purpose of business activity is generally tax deductible. According to Business Income Tax Act interest is deductible even if it is contingent on the profit of the debtor (participating loan).
2.1.2. If interest is paid on debt incurred for the purpose of non-business activity, it may be deductible if the debt is incurred for the purpose of acquiring taxable income in accordance with the Income Tax Act.
2.1.3. Expenses relating to an activity for which the taxpayer is required to keep books are allocated in accordance with the Business Income Tax Act even in the case where the income is taxed under the Income Tax Act. Consequently, companies are generally required to deduct interest onPage 5 an accrual basis. For example, interest on a zero bond is allocated over its maturity period.5
2.1.4. Only the real interest expense is deductible. There are no tax provisions providing for deductions exceeding the real interest expense or for the possibility of making a notional interest deduction. However, interest paid on a zero-coupon convertible loan is considered to be interest until conversion. Therefore the issuer may deduct the interest on zero-coupon convertible loans on accruals, even if the payment of interest is not effected due to conversion before maturity.6
2.2.1. Interest income is subject to comprehensive taxation. No inflation adjustments may be made to the amount of taxable interest. Interest income received by a corporate lender resident in Finland...
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