Special circumstances affecting dividend payments

It may be that after a limited-liability company’s meeting of shareholders agreed to distribute dividends, the agreement was later cancelled. Dividend cancellation is acceptable from the perspective of taxation only if the company cancels them before the date when the dividends are available for withdrawal. However, if a compelling reason as defined by law has caused the cancellation, the tax authorities will deem the cancellation to be acceptable.

Read more in the detailed guidance “Taxation of dividend income — Osinkotulojen verotus, section 5.4 – Cancelling the distribution of dividends (in Finnish and Swedish).

 If the shareholder does not withdraw the dividends before the expiration date of the dividend rights, the dividend rights cease to exist and non-withdrawn funds will remain with the company.Read more about conditions of expiration and its consequences in  taxation in “Withholding tax on payments of dividends and submitting the required reports to the Tax Administration” — Ennakonpidätys osingosta ja Verohallinnolle annettavat ilmoitukset, section 4 of the detailed guidance (in Finnish and Swedish)

A limited liability company can choose to pay out dividends in assets other than cash (dividends in kind). Typically, corporate shares can be distributed to stockholders instead of cash dividends. The fair market value of the assets received, on the date when dividends were first withdrawable, determines the amount of the dividend in taxation.

How to withhold tax

If no cash dividends were distributed simultaneously with the dividends in kind, no preliminary tax or w tax at source has been possible to withhold for the payor company. In these circumstances, the beneficiaries will need to pay their income tax on the received dividends in the form of back taxes or – for taxpayers who are nonresidents in Finland – in the form of   tax at source that the The Tax Admininistration will impose. Residents who have received noncash dividends may avoid having to pay any back taxes by submitting an application for a prepayment or additional prepayment. Read more about applying for prepayment calculations:

• Prepayments – corporate taxpayers
• Prepayments – individual taxpayers

Instructions for submitting tax returns and reports — transfer taxation

If dividends were distributed in non-cash terms but the payor was able to withhold some money upon distribution, the payor must submit a tax return on self-assessed taxes to inform the Tax Administration of the amount withheld. The payor must submit an annual information return to the Tax Administration to provide details on the dividend in kind distributions made. In the same way, authorised intermediaries are required to submit the necessary returns and reports concerning the nonresident beneficial owners, for which the authorised intermediary has assumed responsibility, and also concerning any transferred distributions to another authorised intermediary. The dividends’ value to be entered in the reporting is the fair market value of assets on the day when the dividends were first available for withdrawal. 

The payor may in some circumstances have paid transfer tax on the beneficiary’s behalf. If the payor paid the transfer tax, its amount is normally deemed to be part of the beneficiary’s dividend income. Accordingly, taxability will be determined in the same way as that of cash dividends. From this, it follows that when reporting the total dividends going to the beneficiary, the payor must include the sum of the transfer tax in the annual information return on dividends.

Read more about dividends  in kind in the detailed guide Taxation of non-cash dividends.

Substitute dividend refers to compensation received in place of dividend. Substitute dividends are paid for example on the basis of a share-based loan agreement, repurchase agreement or other contractual arrangement, through which the right to receive dividends is
temporarily transferred.  In income taxation, substitute dividends are comparable to dividends. If the payee is an individual or an estate of a deceased person and resident taxpayer, the party being the payor must withhold a preliminary tax on the paid compensation substituting for dividends.

The provisions concerning dividends in the Act on the taxation of nonresidents’ income also apply to substitute dividends. However, the OECD Model Tax Treaty’s provisions do not equate the substitute dividends as dividend income. Instead, from the perspective of the relevant tax treaty and how it is applied, such a compensation is “business profits” for the payee as referred to in Article 7, or “other income” as referred to in Article 21. This concerns situations where the contracting states have a tax treaty where the Article on dividends is based on the OECD Model Tax Treaty. If the applicable tax treaty poses no restriction against Finland’s taxing rights, the payor needs to withhold tax on a paid amount sourced to Finland in the same way as tax is withheld at source when paying out normal dividends. The party that withholds the tax at source is the actual payor of the substitute dividend.

When preliminary tax or tax at source has been withheld, the payor must submit a tax return for self-assessed taxes. In addition, central securities depositories, investment service companies, foreign investment service companies or other investment service providers, that act as intermediaries between the stocks’ lender and borrower, must give details on the substitute dividends they have paid or transferred to the extent that they have the relevant information and details.

Read more

• about the required annual information returns (form and instructions for completing the form)
• about relevant tax treatment in “Taxation of dividend income” — Osinkotulojen verotus (in Finnish and Swedish)

A depositary receipt is an independent financial instrument representing the holder’s right to company’s shares. Typically, the holding is stated in the form of a ratio. The most frequently occurring is the 1:1 ratio, meaning that one depositary receipt represents one share.  Provider of the depositary receipts has the underlying corporate shares in custody, their quantity being equal to the receipts issued.  Investors can sell and buy depositary receipts in the same way as the sell and buy actual corporate stocks; dividends can be payable based on depositary receipts, and it is usually possible to convert them back to the stocks they represent.

In tax-assessment practice, the standard approach is to deem the party having the depositary receipts in their possession as liable to pay income tax on dividends received from sources in Finland. In circumstances where a deposit bank holds the actual corporate stocks, the Finnish company that issued them – when paying dividends to the bank – must withhold preliminary tax or withhold tax at source on the dividend payments, depending on the payees’ tax liability status (resident or nonresident). After that, the bank pays the net dividend income on to the holder of the depositary receipt. The Finnish payor company that issued the actual corporate stocks must submit a self-assessed tax return, detailing the amounts withheld. In addition, the company must submit an annual information return on dividends to provide further information. The tax treaty between Finland and the country of residence of the holder of depositary receipts can be applied to dividends if the requirements for the application of the tax treaty in question are met. If the beneficiaries submit applications later for refund of the tax withheld at source, they are expected to specify that the received dividend income was connected with the payee’s holding of depositary receipts.

Instructions for completing refund application forms:

• Application for refunding Finnish tax withheld at source – foreign corporate entities (6163)
• Application for refund of tax withheld at source – natural person (6164e)

From the perspective of taxation and reporting requirements of capital gains, no importance is attached to whether the traded securities in question were corporate shares or merely depositary receipts. Read more about taxation of capital gains (in Finnish and Swedish).

The reason for payment of this type of compensation is that a recent commercial trading contract of stocks has taken place but the seller is unable to deliver shares cum dividend to the buyer although the contract indicates that the buyer bought the shares in such a way that on the record date the buyer is the owner of the shares and the party entitled to receive dividends. In these circumstances, the seller must normally pay compensation in cash to the buyer because the dividends did not go to the buyer. The compensation paid as described above is similar to an indemnity paid for damages. As a result, it falls into the category of “other capital income” subject to tax. The sum total of the issuer and payor company’s dividend distribution does not include the compensation paid as described above. Instead, the compensation is an amount of money paid from one party in a securities trading contract to the opposite party; accordingly, it is not connected with or processed within the Book-entry system. The compensation is not paid by the issuer but by the party that failed to fulfil its obligation. 

Although there are similarities, it is important not to confuse the compensation discussed here with the dividend corrections done regularly in the book-entry system. Making corrections to the Book-entry system’s records may be caused by reasons like an already executed dividend payment that has gone to the wrong payee because of a delay in securities settlement. After the correction is finalised the dividends are paid, through the Book-entry system, to the party actually entitled to them. It is important to note that the correction paid is treated as a payment of dividends for purposes of taxation. In contrast, the cash compensation discussed above is not treated as dividends. For more information on error correction, see After payment of dividends under Making corrections.

Cash compensation paid to residents

Assessment of income taxes on the cash compensation is the same as that on the underlying dividend income. For resident taxpayers being the beneficiaries, this means that the amount of taxable income of cash compensation is determined the same way as for normal dividends and preliminary tax must be withheld from the amount of taxable income. Where the payee is a natural person or an estate of a deceased person, the payor or substitute payor must withhold preliminary tax. The payor or intermediary is under obligation to submit an annual information return as appropriate, called  “vuosi-ilmoitus luonnollisille henkilöille ja kuolinpesille maksetuista ja välitetyistä osingon sijaan maksetuista rahakorvauksista” (under § 7 of the Official decision of the Tax Administration on requirement to report information – Verohallinnon päätös yleisestä tiedonantovelvollisuudesta (available in Finnish and Swedish). In the same way, if the payor effected the payments from outside Finland, or an intermediary brokered the amounts outside Finland, the annual information must still be submitted.

Annual information return on payments of interest and aftermarket bonuses as governed by the Income Tax Act (7805)

If the payee of the cash compensation is a corporate entity, no preliminary withholding needs to be carried out, and the payor or intermediary does not have an information-reporting requirement.

Cash compensation paid to nonresident taxpayers in Finland

The provisions of most Finland’s tax treaties set out that only the beneficiary’s country of residence has the taxing rights in respect of this type of income, and consequently no tax has to be withheld in Finland at source. However, if the applicable tax treaty contains no provision that would restrict Finland’s taxing rights here, the payor of the cash compensation must withhold 30% tax at source, if the beneficiary is a natural person or a party other than a corporate entity, and 20% tax at source if the beneficiary is a corporate entity. The party that withholds the tax at source is the payor. Concerning nonresident payees, the payor must submit the annual information return concerning paid compensation in cash subject to tax at source (§ 17, Official decision on information-reporting requirements (available in Finnish and Swedish).

Frequently asked questions on cash compensation paid in lieu of dividends (cash compensation)

On account of the stock seller's short selling contract, the seller cannot provide shares with dividends to the stock buyer as had been agreed in the terms and conditions of trading. Because of this, the seller compensates for the lacking dividends by making a cash payment to the buyer. Is the cash compensation paid in lieu of dividends regarded as a dividend payment?

• A cash compensation in lieu of dividends is not a dividend payment.
• If no dividends have been paid on the shares traded, neither to the seller nor to the buyer, it is not possible to adjust dividend payments between the parties later. In such a case, compensation paid to the buyer for non-received dividends is typically cash compensation.
• The cash compensation is not paid by the issuer but, as a rule, by the party that failed to fulfil its obligation.

Should a cash compensation paid to a non-resident taxpayer be reported in the authorised intermediary's annual information return?

• Only identity information of dividend beneficiaries is reported in the authorised intermediary’s annual information return (WRP101).
• Cash compensation paid to non-resident taxpayers is reported using payment type D3 (monetary compensation) in the annual information return on payments to non-residents (VSRMUERI).

A resident taxpayer pays a cash compensation to a non-resident beneficiary. Should tax be withheld at source or should an annual information return be filed?

• If the payer is a resident taxpayer in Finland, it is liable to withhold tax at source based on § 9(1) of the act on tax prepayments (Ennakkoperintälaki 1118/1996).
• As a rule, the payer is the party that makes the payment from its own funds.
• The obligation to withhold tax at source also requires that the cash compensation is paid because the payer is obliged to compensate the buyer for the dividends the buyer did not receive from Finland despite being entitled to them under the terms and conditions of trading.
• In practice, tax treaties often provide that only the country of residence of the party receiving cash compensation has the taxing right. In such a case, Finland does not have the right to tax the income, and no tax can be withheld.
• An annual information return must be filed on the cash compensation paid to the non-resident taxpayer if the payment is subject to tax at source.

A non-resident custodian pays a cash compensation to a non-resident beneficiary. Should tax be withheld at source or should an annual information return be filed?

• No, the non-resident custodian should not withhold tax at source from the cash compensation in this case, because the income is not received from Finland.
• In such a case, an annual information return need not be filed in Finland.

When cash compensation is paid, what kind of receipt can the custodian give to the payment recipient for use in a tax-at-source-refund application?

• When a cash compensation in lieu of dividends is paid, a receipt for a dividend payment cannot be provided for purposes of taxation in Finland. Instead, the receipt must indicate that the payment is cash compensation paid in lieu of dividends.
• The receipt must also indicate to which country the tax has been paid.

If the payor company is foreign-registered and not treated as having a place of effective management in Finland, receipts of dividends are seen as income sourced to foreign countries. Whether tax must be paid in Finland on cross-border dividends, interests and royalties depends not only on the tax treaty but also on the national tax laws of the countries concerned and on EU law.

Natural persons

Foreign dividends are taxed in the same way as dividends received from Finland, if they are from:

• a company matching the Parent-subsidiary Directive’s definition ‘company of a Member State’.
• the tax exemption is conditional on distributing company being taxed at least 10% on the income – with no alternative options or exemptibility — based on which the dividend is distributed and
  • the company’s domicile is in a country within the European Economic Area according to the country’s legislation, and the domicile is not in a country outside the European Economic Area for purposes of a tax treaty for the avoidance of double taxation; or
  • a country with which Finland has a tax treaty concerning dividends.
• Read more about dividends sourced to foreign countries

The dividends received from foreign corporate entities other than above are fully taxable earned income. Read more in the detailed guidance “Taxation of dividends” — Osinkojen verotus,  section 3.3 (in Finnish and Swedish).

If the foreign payor withheld tax at source on its dividend payment, this foreign tax at source can usually be credited by Finnish tax authorities. For more information on how foreign-country withholdings are credited, see Relief for international double taxation.

Corporate entities

The Act on the taxation of business income contains detailed rules (§ 6 a of the Act) on the taxation on dividends received from a foreign corporate entity. The following factors, among others, have an effect:

• Whether the payor and the beneficiary own one other’s stocks.
• The payor's country of tax residence.
• Whether the income is attributable to a permanent establishment of a Finnish company in the country of source.

Additionally, in the case of dividend income, the following aspects are important:

• Whether the entities being the payor and the beneficiary are stock-exchange listed.
• Whether the dividend-yielding shares are regarded as investment assets or regarded as part of other assets.

Read more in the detailed guidance “Taxation of dividend income” — Osinkojen verotus, section 3.3 (in Finnish and Swedish). If the dividends sourced to a foreign country are not deemed to be tax-exempt income in Finland, the dividends may become subjected to international double taxation. For more information on how double taxation is relieved, see Relief for international double taxation.

If a Finnish non-profit or a fully or partially tax-exempt corporate entity is a payee of dividends sourced to another Nordic country, a specific agreement can be made between the Finnish Tax Administration and the tax authorities of the Nordic country of source that no tax needs to be withheld at source. Read more in detailed guidance: Exemption from taxes on dividends in the Nordic countries.

Obligations of a foreign payor of dividends

In general, no obligation is imposed on foreign payors of dividends to withhold Finnish taxes at source, including preliminary withholding and tax at source (lähdevero; källskatt). However, if the payor is a foreign corporate entity deemed to be a resident taxpayer because of its place of effective management (under § 9, subsection 9 of the Act on income tax), its obligations and responsibilities are the same as those of a domestic payor.

Account operators’ and intermediaries’ requirements to submit reports

If the foreign corporate entity’s stocks or depositary receipts are on the records of the Finnish book-entry system, account operators referred to in the Act on the Book-Entry System and Settlement Activities (348/2017) and payment intermediaries must give details on any dividends connected with depository receipts and foreign shares, processed in the Finnish book-entry system, also including other dividends based on foreign shares and income paid on a foreign UCITS share. This information needs to be provided only if the beneficiary is a Finnish resident taxpayer.