Implementation of the TRACE system

The procedure in accordance with TRACE (Treaty Relief and Compliance Enhancement) will be implemented in Finland with a legislative change that comes into force 1 January 2021. The legislative changes concerns dividends paid by a publicly listed company to nominee-registered shares, the beneficiaries of which are non-resident taxpayers.

What is TRACE

The OECD's TRACE is a system for withholding tax at source on distribution of profits in accordance with tax treaties, in other words how tax treaty benefits can be granted at the time of payment. The TRACE Implementation Package (TRACE IP) has been drafted on the system and the document is available on the OECD's website.

In TRACE, there areno recommendations on the tax-at-source rate, who is liable for the tax, or how tax treaties should be interpreted. The procedure is voluntary for both countries and the business industry, and gives countries various options for implementation.

Key elements of TRACE and their implementation in Finland

The key elements of the TRACE system:

  • The Authorised Intermediary system
  • Investor Self-Declaration procedure
  • Annual reporting with TRACE Schema

The Authorised Intermediary system

For implementation of the system, the TRACE IP describes the standard agreements to be made between the Authorised Intermediary (AI) and the source countries as well as the AI and the Contractual Intermediary (CI). In the TRACE IP, an alternative way is registration into a register maintained by the country of residence of the issuer of the security.

Finland will not adopt the standard agreements in the TRACE IP. Instead, Finland implements the TRACE system by adopting the Register of Authorised Intermediaries and the intermediaries undertake certain responsibilities by registering into the register. In Finland, the role and responsibilities of an Authorised Intermediary are based on legislation. TRACE's Authorised Intermediary role is translated into Finnish as “registered intermediary”.

Tax treaty benefits may be granted at source to the clients of an AI by utilising the ISD procedure outlined in TRACE and the information is submitted in a TRACE annual information return to the Tax Administration. Registration into the Register of Authorised Intermediaries is voluntary. Assuming tax liability for the dividends can be determined by the Authorised Intermediary per beneficiary or per payment.

An Authorised Intermediary

  • has the responsibility to investigate and verify the eligibility to tax treaty benefits of the dividend beneficiaries' that it assumes liability for.
  • has the responsibility to submit annual information return on the dividend beneficiaries.
  • has the tax liability for a possible under-withholding on the dividends it has transferred.

Contractual Intermediary

The CI in accordance with the TRACE IP corresponds to an unregistered intermediary in Finland. The responsibilities of CIs are based on agreements made with the AI or the payor. There are no provisions in the Finnish legislation on the contractual relations between the AI and the CI. However, in their operations the intermediaries can utilise the standard agreements between the intermediaries described in the TRACE IP.

In Finland, the List of Excluded Intermediaries in accordance with the TRACE IP is not implemented.

Investor Self-Declaration

The TRACE IP describes the Investor Self-Declaration (ISD) procedure for investigating and identifying the dividend beneficiary based on the Investor Self-Declaration (ISD). In the procedure, the dividend beneficiary has the responsibility to provide the information necessary for granting tax treaty benefits in the ISD. The AI has the responsibility to verify the reliability of the information given by the dividend beneficiary, based on other information it has in its possession and verify, which tax treaty is applied to the beneficiary.

The TRACE IP describes the ISD forms, in which the dividend beneficiary declares the required information. Finland will implement the ISD procedure as a voluntary procedure to investigate and identify the dividend beneficiary. The ISD forms in the TRACE IP may be utilised in the procedure, and information may be collected electronically.

Annual reporting with TRACE

In relation to the TRACE procedure, the OECD has published an international TRACE Schema, with which the AI submits the annual information return in xml-form. The TRACE Schema, with which the AI reports the information on the dividend beneficiaries necessary in the taxation at source to the Tax Administration, will be implemented in Finland.

Independent Reviewer procedure

The TRACE procedure contains a review performed by an Independent Reviewer, which countries can implement. In the procedure, a third party performs a review of the AI’s compliance with its obligations under the TRACE procedure and prepares a report of this.

In Finland, the Tax Administration supervises that AIs fulfil their responsibilities. However, an AI may voluntarily use an Independent Reviewer that prepares a report. With the report, the AI may show proof to the Tax Administration that it has complied with the legal requirements and the Tax Administration's guidance.