Interest to be paid on refunds of taxes withheld at source

This instruction is replaced by instruction Tax at source procedure applied to a non-resident taxpayer’s income and a key employee’s wage income, 8.3.2023 VH/1987/00.01.00/2022.

This is an unofficial translation. The official instruction is drafted in Finnish and Swedish languages.

These instructions concern the interest payable on refunds of taxes withheld at source on nonresidents’ income. The instructions were updated on 1 November 2017, due to legal amendments related to determining the amount of interest. The legal amendments do not apply to interest payable on tax refunds from 2016 or earlier; the rules used for calculating refund interest before the legal amendment will continue to apply to these refunds.

1 Introduction

Interest is paid on refunds of tax withheld at source in accordance with section 11.4 of the Act on the Taxation of Nonresidents' Income. Non-residents and Finnish resident taxpayers are treated equally when calculating interest on tax refunds. The legal amendment on interest payable on refunds of tax withheld at source (HE 95/2014) entered into force in early 2015. The legal amendment (under the Government Proposal HE 95/2014) came into force at the beginning of 2015 and the new practice first applies to refunds relating to 2014 and the following years. However, because of the Court ruling, the Tax Administration pays interest also to refunds for the year 2013 or earlier if a claim for interest is lodged within the appeal period specified below.

Interest will be automatically added when refunding tax withheld at source. According to the Act on the Taxation of Nonresidents’ Income, if too much tax has been withheld at source, the beneficiary may ask for a refund during the three calendar years that follow the year of withholding (§ 11, subsection 2, Act on the Taxation of Nonresidents' Income). The three-year deadline is first applied on income paid in 2017. If the withholding tax was held before 2017, the refund must be requested during the five calendar years that follow the year of withholding.

The interest on refund has not been automatically added to refund decisions made by the Finnish Tax Administration before 2014. If the interest has not been added, the applicant must lodge an appeal within the statute of limitation for an appeal. Since such decisions, where the interest has not been automatically added, have only been made before 2015, the five-year-deadline for lodging an appeal will apply. Therefore, the beneficiary can lodge an appeal within the five calendar years that follow the year when the decision was made. For the calculation of interest, a corporate entity, as the beneficiary and applicant, must submit documentation of the accounting period in which the payment in question is included.

For more information, visit Refunds of tax withheld at source

2 Interest calculation rules

2.1 Calculation of interest on refunds of tax withheld before 2017

The rules on interest paid on tax withheld at source were revised in a legal amendment effective from 1 November 2017. However, for refunds concerning taxes withheld 2016 or earlier, the previous interest calculation rules as described in this section still apply.

Interest paid on corporate tax refunds and refund interest paid to taxpayers other than a corporation or benefit under joint administration is based on the reference rate referred to in section 12 of the Interest Act, for the six-month period preceding each calendar year, minus two percentage points. However, the provisions of § 40 and § 43 of the Act on Assessment Procedure have set out the minimum applicable rate as 0.5%. According to the § 11.4, Act on the Taxation of Nonresidents’ Income, the interest to the refund is paid in accordance with the interest calculation rules described in § 40-46 and § 77, Act on Assessment Procedure. Therefore, non-residents and Finnish resident taxpayers are treated equally when calculating interest on tax refunds. When the Tax Administration pays Finnish-resident corporate taxpayers interest on tax prepayment refunds, the interest added under section 41 of the Act on Assessment Procedure is calculated from the day after the deadline of the taxpayer's income tax return. Correspondingly, interest is paid on refunds of tax withheld at source from the day after the deadline of the corporate taxpayer’s income tax return, in accordance with the recipient’s accounting period. When the applicant is an individual, the interest is calculated the same way as for a Finnish resident individual: the refund earns interest under § 44, Act on Assessment Procedure, starting 1 February of the year following the tax year. This way, under § 77, Act on Assessment Procedure, the above dates serve as the start dates of the interest periods relating to adjustments of a corporate or individual taxpayer's taxes, and the period end date is the date when the refund is paid.

Corporate taxpayers must file their income tax returns within four months from the end of their accounting period. If two accounting periods have ended during a single calendar year, the start date of an interest period is the day after the deadline date of income tax return filing for the accounting period that ended last. For the calculation of interest, a corporate entity, as the beneficiary and applicant, must submit documentation of the accounting periods during which the income mentioned in the application was paid.

Calculations are performed separately for each tax year. For information on earlier years' rates, see the previous versions of the guidance on interest rates (available in Finnish and Swedish): Peruskorko on pysynyt ennallaan ja viitekorko on laskenut.

Example 1: Taxes were withheld at source in 2010. The applicant is a corporate taxpayer whose accounting period end date was 31 December 2010. The period for interest calculation starts 3 May 2011 and ends on 24 April 2014, the date of the Tax Administration's decision on paying the refund and the interest. In this case, if the amount to be refunded were €1,000 then the interest to accrue on it would be €14.89.*)

Example 2: Taxes were withheld at source in 2010. The applicant is an individual taxpayer. The period for interest calculation starts 1 February 2011 and ends on 24 April 2014, the date of the Tax Administration's decision on paying the refund and the interest. In this case, if the amount to be refunded were €1,000 then the interest to accrue on it would be €16.17.*)

Example 3: A corporate taxpayer submits an appeal for getting an adjustment to an earlier decision of the Tax Administration on a refund that was paid to the corporate taxpayer without any interest added to it. Tax had been withheld at source in 2007, and the applicant's accounting period ended 31 December 2007. The date of the decision was 2 January 2009. In this case, the €1,000 that was refunded must accrue interest, first for the period from 1 May 2008 to 2 January 2009 - the date of the original decision - amounting to €16.81. Secondly, interest is added to the €16.81 for the interest period up to 24 April 2014, which is the date when the decision on the appeal was made. As a result, the total interest to accrue on the refund is €17.59.*)

*) The Tax Administration additionally pays interest for a period starting on the date of the decision and ending on the date of the actual payment transaction. Interest is then calculated on the refund of tax withheld and also on the unpaid interest.

2.2 Calculation of interest for a refund on tax withheld in 2017 or thereafter

The new interest calculation rules are first applied to refunds that concern withholding taxes withheld in 2017. According to section 11.4 of the Act on the Taxation of Nonresidents’ Income, the rules given in section 32 of the Act on Tax Collection (9.9.2016/769) apply when calculating interest on a withholding tax refund. According to Section 32 of the Act on Tax Collection, if, when refunding taxes, interest or credit interest in accordance with section 12 is payable, if not otherwise provided in the tax legislation in question the interest shall be calculated as annual interest, which shall be the reference interest rate in force during the six-month period preceding each calendar year, minus two percentage points, as referred to in section 12 of the Interest Act (633/1982). However, the interest rate is always at least 0.5 %.

The same interest calculation rules apply to both corporate and individual taxpayers. According to section 32.2 of the Act on Tax Collection, interest on tax withheld at source is calculated from the first day of the second month following the end of the tax year in which the tax was withheld or, if the tax is paid after the month following the end of the tax year, from the day following the payment date to the day on which the refundable amount is debited from the Finnish Tax Administration's account or used in lieu of a tax payment. Interest payable on tax withheld at source is no longer calculated for corporate applicants based on the final deadline for tax returns in accordance with the applicant’s accounting period, but on the basis of the end of the applicant's tax year. According to section 3.2 (18.12.1995/1558) of the Act on Assessment Procedure, the tax year is the calendar year or, if the accounting period as described in the Accounting Act (1336/1997) is not a calendar year, the accounting period or periods which ended during the calendar year.

Example 1: The applicant has applied for a refund of tax withheld at source, which was withheld in 2017. Because the applicant’s accounting period is the calendar year, the applicant’s tax year is also the calendar year. The refund application is accepted. The tax withheld at source was withheld during the tax year 2017 and the tax was paid before the end of the tax year. As a result, interest is calculated from 1 February 2018 to the refund payment date of 31 July 2019. If the amount of refundable tax withheld at source amounts to EUR 1,500 and, in accordance with section 32.1 of the Act on Tax Collection, the interest percentage for the entire period is 0.5%, interest of EUR 11.22 is accrued.

Example 2: The applicant has applied for a refund of tax withheld at source, which was withheld on 15 November 2017. The accounting period of the applicant is 1 November 2017 – 31 October 2018. The applicant’s tax year ends on 31 October 2018. As a result, interest is paid on the refund of tax withheld at source, covering the period from 1 December 2018 until the date on which the refund is paid to the applicant from the Tax Administration's account.

The same interest calculation rules also apply to any refund of tax withheld paid as a result of an accepted appeal.

Example 3: An applicant has received a rejected decision on a refund of tax withheld at source. The applicant appeals against the decision. The appeal is accepted. The tax withheld at source was withheld in 2017. Because the applicant’s accounting period is the calendar year, the applicant’s tax year is also the calendar year. As a result, interest is calculated from 1 February 2018 to the refund payment date based on the appeal decision, i.e. 31 January 2020. If the amount of refundable tax withheld at source amounts to EUR 1,500 and, in accordance with section 32.1 of the Act on Tax Collection, the interest percentage for the entire period is 0.5%, interest of EUR 15.00 is accrued.