Paying dividends — tax assessment of the dividend income

All references to ‘payor’ here are intended to mean the company distributing dividends. If the Book-entry system is in use for the company’s corporate stocks, the word ‘issuer’ can be used in parallel – also meaning the company distributing the dividends. In general, the tax guides and instructions released in Finland use the word ‘payor’ – maksaja; betalare.

In principle, payors have the following responsibilities:

• They must withhold an amount on the dividends being paid out; the withheld amount is either a withholding taxation or a tax withheld at source.
  • This requires that the payor has identified and determined the recipient’s tax status
  • Another responsibility imposed on payors is that they must ask the recipients to provide evidence if the recipient claims any benefits or exemptions and the payor does not yet have sufficient evidence
  • Read more about amounts withheld including tax withholding at source
  • Further instructions on complying with the payor’s withholding obligation (section 2.2 of the detailed guidance “Amount withheld on paid-out dividends, reporting to the Tax Administration” — Ennakonpidätys osingosta ja Verohallinnolle annettavat ilmoitukset) (available in Finnish and Swedish)
  • More detailed information about how tax is withheld at source (the detailed guidance Withholding tax at source on dividends, interest and royalties, and the payor’s obligations, section 1.2 – Obligation to collect tax at source)
• the payor submits a tax return on self-assessed taxes and annual information returns. Read more about filing and paying self-assessed taxes and about submittal of annual information returns.
• the payor is additionally under obligation to provide data on its income tax return concerning the distributed dividends. Read more about informing the Tax Administration of a dividend distribution.

The party having the primary fiscal liability and the information-reporting requirement is the company distributing dividends. For companies using the book-entry system, it is normal that the services provided by account operators include the withholding of taxes and all the related reporting to the Tax Administration. However, when paying dividends distributed by a stock-exchange-listed company to a nonresident in situations where the underlying stocks are nominee-registered, a set of responsibilities and obligations laid down in tax legislation also concern the authorised intermediaries handling the transactions.

For Finnish issuer companies, the responsibilities under law are unchanged regardless of whether the stock issue had taken place at a central securities depository in a foreign country or at a Finnish securities depository.

For purposes of income taxes, corporate entities founded or registered in foreign countries, that have their place of effective management located in Finland (within the meaning of § 9, subsection 1 of the Act on income tax) are equated with Finnish payors of dividends. This means that the above entities have an obligation to withhold taxes and an information-reporting requirement no different from the obligations imposed on Finnish companies. However, an important factor that determines the way taxes are withheld and how much should be withheld is whether Finland also is deemed to be the entity’s “treaty” country of residence.

Read more

• about the primary liability for paying the unpaid tax (in the detailed guidance Withholding tax at source on dividends, interest and royalties, and the payor’s obligations, section 5 – Tax liability)
• about authorised intermediaries’ legal responsibilities
• about foreign entities’ responsibilities when the entity is equated with a Finnish payor of dividends by virtue of its place of effective management (in the detailed guidance Resident and nonresident tax liability of corporate entities, section 4.3 – Payments made by a foreign corporate entity treated as being a Finnish resident)

Generally, the recipient of dividends’ can be defined as a shareholder registered in the company’s list of shareholders. Exceptions include situations where a manager of nominee-registered holdings is registered in the company’s list of shareholders in place of the actual shareholder. There may be other exceptions (such as dividend distributions to a shareholder-beneficiary based on his or her work efforts, and payments of dividends to non-shareholder parties).

• Read more about the treatment of dividends based on work effort (in Finnish and Swedish).
• Read more about paying dividends to payees other than shareholder-beneficiaries (in the detailed guidance “Taxes on receipts of dividends effectively connected with a work effort of the company shareholder — “Työpanokseen perustuvan osingon ja ylijäämän verotus”, section 5.3. section 5.3) (in Finnish and Swedish).

Moreover, payors need to be aware in situations where treaty benefits are being claimed that the recipient may be different from the ‘beneficial owner’ the treaty refers to. Articles of tax treaties normally restrict the treaty benefits, which means that the benefits can be granted to the beneficial owner only. Read more about the concept of beneficial owner of the income in the detailed guidance Payments of dividends, interest and royalties to non-residents 2.1.2 – Requirements for applying tax-treaty benefits.

Residents as a recipient of dividend income, a resident’s obligations are:

• to inform the Tax Administration of the receipts of dividends on their tax return, or
• to check the entries of the resident’s pre-completed tax return (natural persons) in order to make sure that the payor has provided correct information the Tax Administration.

Nonresidents as a recipient of dividend income, a nonresident taxpayer’s obligations are:

• to give evidence of their status of nonresidency for purposes of Finnish taxation;
• if asked to do so, to provide the payor with documentation to prove the nonresidency status. Read more about the claiming of treaty benefits in the detailed guidance Withholding tax at source on dividends, interest and royalties, and the payor’s obligations, section 2.3 – Tax-at-source benefits during the year of payment.
• if asked to do so after the nonresident recipient claims treaty benefits, to provide the payer with documentation explaining how Finnish national legislation or EU law are invoked. Read more in the detailed guiidance Withholding tax at source on dividends, interest and royalties, and the payor’s obligations, section 2.4 – Tax-at-source benefits based on national legislation of EU law.
• to submit an application for having the income tax imposed on the nonresident taxpayer, if the payor was unable to withhold tax at source when paying the dividends (for example, if dividends were paid in non-cash terms). Read more about how tax that should have been withheld at source can be imposed on the payee, in the detailed guidance Tax at source procedure applied to a non-resident taxpayer’s income and a key employee’s wage income, section 4.

If the dividend recipient provides wrong information to the tax authorities, the possible consequences include taxation by imposed taxes (instead of self-assessment), a punitive tax increase, and late-payment penalty charges. If the wrong information was connected with an intention to avoid taxes, this may result in criminal punishment (due to tax fraud).

The party working in co-operation with the central securities depository is an account operator in a situation where a licence is issued by the securities depository for making records and entries in the book-entry system, to open client accounts there and to conduct various transactions as determined by law and the relevant other regulations.

For companies using the book-entry system, it is normal that the services provided by account operators include the withholding of taxes and all the related reporting to the Tax Administration. However, under Finnish tax legislation, account operators have no tax liability. Certain account operator also act as authorised intermediaries. This may result in the account operator having to assume liabilities and responsibilities as defined by law.

An authorised intermediary is an intermediary with a currently valid registration in the Tax Administration’s register of authorised intermediaries. Examples of intermediaries include credit institutions, investment service companies and central securities depositories.

Authorised intermediary can assume responsibility, on its client’s behalf, for performing the tasks and duties relating to the payments of dividends and to the granting of treaty benefits and other benefits concerning tax withholding at source. The responsibilities and liabilities of authorised intermediaries concern dividends distributed by listed companies when the shareholder has a nominee registration and the payment goes to a nonresident taxpayer.

Read more in detailed guidance: Authorised Intermediaries’ responsibilities and liabilities.

What is meant by ‘contractual intermediary’ is a member not having a valid registration in the Tax Administration’s register of authorised intermediaries, in the custody chain of a nominee-registered shareholding arrangement.

The Central Securities Depository is the organisation referred to in the Act governing the Securities Depository System and the clearance system. The Central Securities Depository of Finland maintains the Book-entry system where accounts can be opened for registering limited-liability companies’ stocks and other securities, often called “book-entry shares”. The statutes of the central securities depository define how payments of dividends should be effected when any of the companies that use the book-entry system distribute dividends.

Responsibilities of the central securities depository include the requirement to provide the Tax Administration with information concerning:

• substitute payments of dividends
• the owners of book-entry shares, the recipients of various forms of yield, and the securities currently recorded in the book-entry system