INSIGHT: Finnish-Sourced Dividends Paid to Nominee-Registered Securities

Abolishing the current so-called “simplified procedure” means that dividends previously subjected to the withholding tax (WHT) rate of 15 percent may now be subject to the WHT rate of 35 percent in Finland.

As from 2021, it is expected that this change will significantly increase both the importance and the number of WHT reclaim processes in Finland.

Current Legislation

According to the currently applied rules, the Finnish-sourced dividend payments for nominee-registered shares are entitled to the treaty-based WHT rate—normally 15 percent—on the basis of the so-called simplified procedure.

Under this procedure, the treaty-based WHT rate can be applied at source if certain conditions based on the Finnish Withholding Tax Act are met. In practice, the WHT treatment is based on the information of the dividend recipient’s residence country, and no information on the identity of the dividend recipient is provided to the Finnish Tax Administration if this information is not requested separately.

In the simplified procedure, the Finnish sourced dividend payments for nominee-registered securities have been subject to the WHT rate of 15 percent at source.

The simplified procedure was initially introduced in 2006 to improve the functioning of capital markets in Finland, but in recent years, this procedure has been criticized for the lack of possibilities for the Finnish Tax Administration to supervise effectively that the correct amount of WHT is withheld in Finland.

Currently, there is a lot of uncertainty related to the definition of beneficial ownership and how it should be interpreted in the Finnish context, especially in relation to securities lending transactions.

New Legislation

A proposal for the amendments to legislation concerning nominee-registered securities was highly criticized at the preparatory stages, but the proposal was nevertheless accepted in April 2019.

The main aim of this amendment is to improve tax supervision and the disclosure of final recipients’ identity in terms of Finnish-sourced dividend payments made to nominee-registered securities in order to confirm that the right amount of WHT will be withheld at source. The new legislation will be applied to dividends paid on January 1, 2021 onwards.

The main amendment is that the currently applied simplified procedure will be abolished.

Under the new rules, the treaty-based WHT rate is not applicable if detailed information on the dividend recipient is not submitted to the Finnish tax administration either in connection with the dividend payment or later in the annual information return.

If the information on the final recipient is not provided, Finnish-source dividend payments to nominee-registered shares are subject to the WHT rate of 35 percent at source. The amendment mainly affects foreign shareholders who own nominee-registered securities in Finnish listed companies.

Another major change is that under the new legislation, Finnish-sourced dividend payments to nominee-registered securities held by Finnish residents are subject to the WHT rate of 50 percent. This rule, applicable as from January 1, 2020, is meant to prevent situations where Finnish residents would try to avoid taxation in Finland by using nominee-registered securities.

The new legislation also means amendments to obligations and liabilities of foreign custodian banks and other intermediaries.

Under the new legislation, the current foreign custodian (intermediary) register will be closed and replaced with the new Register of Authorized Intermediaries published on January 1, 2021.

From the beginning of 2021, the custodians registered in Finland will have the principal responsibility to confirm the residence state of final recipient and to confirm that the provisions of tax treaty can be applied to the final recipient.

If the custodian registered in the Register of Authorized Intermediaries provides incorrect information on the applicable WHT rate, the principal liability over the unpaid WHT belongs to the registered custodian. This liability can only be avoided if the registered custodian can prove that the incorrect information was received from another registered custodian in the payment chain. Previously the principal responsibility to collect and pay the right amount of WHT belonged to the Finnish company paying the dividend.

The new legislation introduced in Finland is based on the Organization for Economic Co-operation and Development (OECD) Treaty Relief and Compliance Enhancement (TRACE) model, but currently it seems that Finland will be the first country implementing changes on the basis of this model.

What Can Be Expected?

The new WHT rate of 35 percent applicable to nominee-registered securities is higher than the highest statutory WHT rate currently applicable (30 percent) in Finland.

When Finnish-sourced dividend payments for nominee-registered securities are currently often subject to the withholding tax rate of 15 percent in Finland, this change means that in many cases the WHT rate will be increased by 20 percent.

Since the principal responsibility to confirm that the right amount of WHT will be withheld is shifted from Finnish payer companies to registered custodians, it is expected that in many cases the custodians will be unwilling to bear the potential risk related to unpaid WHT.

This is expected to lead to situations where custodians are mitigating their own risks by withholding the maximum amount of WHT (35 percent) at source instead of applying the lower treaty-based rate.

The claim for the refund of excess WHT can be then filed with the Finnish tax administration. As a result, it is expected that as from 2021, the importance of WHT reclaim processes—as well as the number of pending WHT reclaims at the tax administration—will increase significantly in Finland.

Currently there are many open questions related to the application of the new taxation procedure, but more detailed guidance on this matter is expected to be published by the Finnish Tax Administration at the beginning of 2020.

Anna Tallgren is a Senior Associate and Janne Juusela is a Partner at Borenius Attorneys Ltd, Finland.

They may be contacted at: anna.tallgren@borenius.com; janne.juusela@borenius.com