How to withhold tax on dividends paid to a Finnish tax resident shareholder when the underlying shares are nominee-registered
- Date of issue
- 1/1/2021 - Until further notice
- Replaces guidance
- VH/4329/00.01.00/2019, 1,1,2010
This is an unofficial translation. The official instruction is drafted in Finnish and Swedish languages (record no VH/8446/00.01.00/2020).
Changes were made in April 2019 to the provisions of the Prepayment Act (Ennakkoperintälaki 1118/1996) and a new provision, § 4 a, was added. Under the newly enacted § 4 a, starting 1 January 2020, 50% preliminary withholding must be withheld on any dividends paid in situations where the payor is aware that the shareholder is a Finnish tax resident, the payor has been unable to receive required information to identify the dividend beneficiary, and the shares are nominee-registered. The purpose of this guidance is to instruct payor on what to do if information on the dividend beneficiary is unavailable to the payor at the time when tax should be withheld on dividends, or the identifying information of the dividend beneficiary is not provided to the Tax Administration on an annual information return.
This guidance has been updated due to the amendment of the Act on the Taxation of Nonresidents' Income (Laki rajoitetusti verovelvollisen tulon verottamisesta 627/1978, hereinafter Tax at Source Act) coming into force 1.1.2021 (legal amendment 522/2019). In connection with the update, the role of an Authorised Intermediary in accordance with § 10 c of the Tax at Source Act along with the procedure for investigating and identifying the dividend beneficiary in accordance with § 10 b of the Tax at Source Act and Tax Administration's decision on the contents and period of validity of the Investor-Self Declaration, and the procedure with which its reliability is verified (VH/4332/00.01.00/2020, ISD decision) have been taken into account.
Authorised Intermediary's responsibilities and liabilities are discussed in the guidance Authorised Intermediary's responsibilities and liabilities.
This guidance discusses the circumstances where the payor must withhold 50% on dividends paid on shares recorded in nominee accounts, in reference to the provisions of § 4 a of the Prepayment Act when the payor does not receive identity information on the dividend beneficiary who is a Finnish resident taxpayer. The general rule is that the payor must withhold tax on dividend paid to a Finnish tax resident as required by the Decree on Tax Prepayments (Ennakkoperintäasetus 1124/1996) and report the identity information on the dividend beneficiary, as it is in the payor’s disposal, to the Tax Administration, even if the dividends are paid on nominee-registered shares. The purpose is that the assessment of an individual taxpayer is carried out as it should, and that payors can avoid unnecessary withholding at the 50-percent rate.
The majority of beneficiaries that receive dividends based on nominee-registered shares are nonresidents, when the shares have been issued in the Finnish Central Securities Depositary. The applicable legislation to nonresident dividend beneficiaries is the Tax at Source Act.
2 Holdings of shares in nominee accounts
The legal provisions on the Book-Entry system and on holdings that can be recorded in nominee accounts are found in § 4 of Chapter 4 of the Act on the Book-Entry System and Settlement Activities (Laki arvo-osuusjärjestelmästä ja selvitystoiminnasta 348/2017). To have holdings of shares on a nominee account means that instead of entering the dividend beneficiary’s name in the Book-Entry system, the share is recorded as being held by an intermediary, a “nominee”. The intermediary in charge of nominee registration may be the operator of the Book-Entry account, the central bank or the Central Securities Depository itself. Generally, investment service firms and credit institutions are account operators.
Central Securities Depositories keep issuer-specific registers of shareholders on behalf of the corporate entities that issue shares (i.e. publicly listed companies). In order to identify the dividend beneficiaries of the nominee-registered shares, the intermediary in charge of nominee registration must give, upon request, to the Financial Supervisory Authority the name of the dividend beneficiary, if known, as well as information on how many book-entry shares the dividend beneficiary holds. If the name of the dividend beneficiary of book-entry shares remains unknown, the intermediary in charge of nominee registration must deliver identity information on the agent acting on behalf of the dividend beneficiary and a written statement that affirms that the actual shareholder is not a Finnish natural person, corporate entity or foundation. On request, the above information must also be given to the company concerned i.e. the payor. In order to keep up its tax control activity, the Tax Administration can ask the issuer of the securities to give details on the dividend beneficiary of book-entry shares.
The European Regulation on Central Depositories of Securities (909/2014/EU) is applied in case a Finnish company issues its shares in another EU country, in other words, engages the services of a Central Securities Depository (hereinafter CSD) outside of Finland. What is meant by a Finnish central depository is a Finnish limited-liability company that has received a license to operate as a CSD within the meaning of the Act on the Book-Entry System and Settlement Activities. Even if a Finnish company were the client of a central securities depository outside of Finland, the shares it has issued are still governed by Finnish corporate legislation on the basis of which the company and its shares were incorporated.
Under § 5 a (1) of the Act on the Book-Entry System and Settlement Activities (Laki arvo-osuustileistä 827/1991), only the kind of book-entry shares can be recorded in a client account, for which the account operator has received a contract on asset management, and where the shares belong to a foreign citizen, a foreign corporate entity or a foreign foundation.
Shares held by Finns and issued by Finnish issuers, can only be kept on a book-entry account in the Finnish CSD system and recorded in the investor's own name. For this reason, national legislation does not make it possible to have shares nominee-registered in a Finnish CSD in situations where the shareholder is a Finnish citizen, a Finnish corporate entity or a Finnish foundation.
Taking into account the provisions of the Finnish legislation, it is also permissible to enter the book-entry shares in a foreign CSD's account in situations when the shareholder-client is a Finnish natural person, corporate entity or foundation. This means that securities, managed by an intermediary on behalf of a Finnish natural person, corporate entity or foundation, may be recorded on a nominee basis if the securities have been issued in a Central Securities Depository in a foreign country and the applicable legislation governing the foreign CSD allows nominee registration of Finnish shares. In spite of the fact that the shares of a Finnish company have been issued in a foreign CSD, the Finnish company must abide by the rules set out by Finnish tax legislation concerning the obligations prescribed to a dividend payor.
3 How taxes should be withheld on dividends paid to a Finnish tax resident
3.1 How to withhold tax on dividends paid to a Finnish tax resident beneficiary with full disclosure of identity
Under the provisions of § 9 of the Prepayment Act, distributing companies must withhold tax on dividends paid to Finnish tax residents, unless a specific rule requires that no withholding on the paid-out dividends should be carried out. According to the provision of § 15(1), paragraph 3 on the Decree on Tax Prepayments 25,5% tax must be withheld on dividend paid to a natural person or an estate of a deceased person if the distributing company is publicly listed. No withholding is carried out on dividends paid to corporate entities under § 1(1) of Tax Administration's official decision on relief from the obligation to withhold taxes (Verohallinnon päätös ennakonpidätysvelvollisuudesta vapauttamisesta).
Based on the annual information return submitted by the dividend payor, the amount withheld from the dividend payment will be credited in the assessment of the beneficiary's annual income taxation. This requires that the payor has made certain that the dividend beneficiary is a Finnish tax resident and the payor will submit an annual information return to the Tax Administration containing the beneficiary’s identity information also in cases where the share held by the Finnish resident taxpayer is recorded in a nominee account.
For more information, see Tax to be withheld on paid-out dividends and guidance for reporting (Ennakonpidätys osingosta ja Verohallinnolle annettavat ilmoitukset, only available in Finnish and Swedish).
For more information on the tax treatment of natural persons and corporations that receive dividends, see Taxation of dividends (Osinkotulojen verotus, only available in Finnish and Swedish).
3.2 How to withhold tax on dividends when identity information on the dividend beneficiary is not available
There is a derogation from the above-described main procedure in situations where the payor cannot obtain the identity information of a dividend beneficiary who is a Finnish tax resident. Under § 4 a of the Prepayment Act, if the payor does not receive the information referred to in § 15 e of the Act on Assessment Procedure, the payor must withhold 50 percent preliminary withholding tax on the dividend if the dividend beneficiary is a Finnish tax resident.
The information on the dividend beneficiary refers to the identifying information of the dividend beneficiary in accordance with § 15(1) and 15 e(2) of the Act on Assessment Procedure along with § 41(2) of the Tax Administration’s decision on the general requirement to report information (Verohallinnon päätös yleisestä tiedonantovelvollisuudesta) that the dividend payor must report in its annual information return. The identifying information in accordance with the decision on the general requirement to report information are the dividend beneficiary’s name, personal identity code or Business ID, the gross amount of dividends received by the beneficiary, tax withheld on the dividend and the quantity of shares held by the beneficiary. If the dividend beneficiary has been identified as a Finnish tax resident but the payor does not know the above information – and no other means is available of receiving the above information on the beneficiary’s identity for the annual information return – the payor must withhold 50% preliminary withholding tax on the dividends.
3.3 To identify a dividend beneficiary - a Finnish resident taxpayer
The dividend payor must know whether the owner of nominee-registered shares is a Finnish tax resident or nonresident. In other words, the payor must identify whether the income of the dividend beneficiary is taxed as provided in the Tax at Source Act or as provided in the Prepayment Act. No importance is attached to the provisions of a tax treaty when determining whether the dividend beneficiary is a Finnish tax resident. Read more about tax residency and nonresidency in the Tax Administration’s guidance Tax residency, nonresidency and residency in accordance with a tax treaty – natural persons and Tax residency and nonresidency of organisations (will be published in 2021).
Whether income taxes are assessed under the rules of the Tax at Source Act, or those of the Prepayment Act, has an impact on how the tax is withheld, as well as on how the beneficiary information is reported to the Tax Administration. If the payor does not have identity information on the beneficiaries, the payor must at least have information on whether dividends were paid to a resident or a nonresident.
The dividend payor has the responsibility to report information and the liability for dividends when the beneficiary is a Finnish tax resident also in those situations where the ownership is nominee-registered. The payor can delegate their responsibility to obtain information on beneficiaries to the intermediary nearest to the dividend beneficiary. This intermediary will then follow the agreed procedure in the custody chain and deliver the identity information of the beneficiary to the payor. According to Finnish tax legislation the tax liability and the responsibility to report the information to the Tax Administration is nevertheless always with the payor. An Authorised Intermediary (i.e. an intermediary that is registered in the Register of Authorised Intermediaries, hereinafter AI) can assume responsibility only for dividends that are paid to a nonresident. Therefore, an Authorised Intermediary must submit the information of dividend beneficiaries who are Finnish tax residents to the payor.
An example of circumstances referred to in § 4 of the Prepayment Act is a situation where the payor cannot receive information on the beneficiary from the custody chain, and therefore cannot submit the information to the Tax Administration. The payor is unable to get this information, for example, when the legislation applicable to a foreign intermediary requires an authorisation from the dividend beneficiary to provide the information to the Tax Administration and the intermediary has not received the authorisation from the beneficiary or the beneficiary has stated that their information must not be passed on to the Tax Administration. The tax must be withheld at the 50-percent rate also when the required information is not provided to the Tax Administration for some other reason.
In circumstances within the meaning of § 4 a of the Prepayment Act, 50 percent must be withheld on paid-out dividends regardless of the legal form of the dividend beneficiary. For example, the amount withheld must be 50 percent when the beneficiary of dividends is a limited liability company or some other corporate entity, resident in Finland, but the dividend payor is unable to pass on the beneficiary’s identity information to the Tax Administration.
If an intermediary has in accordance with § 10 b of the Tax at Source Act, taken reasonable measures to determine the dividend beneficiary's country of residence in pursuance of which it detects that the dividend beneficiary's country of residence is Finland, a preliminary withholding tax must be withheld from the payment. If in pursuance of the reasonable measures taken it is detected that the country of residence is not Finland, a tax at source is withheld on the dividend. According to § 10 b of the Tax at Source Act, the following can be deemed as reasonable measure to determine the dividend beneficiary’s country of residence: a tax-at-source card, a certificate of residence or an Investor Self-Declaration. More information of the Investor-Self Declaration (ISD) in the guidance The contents, period of validity and verifying the reliability of the Investor Self-Declaration.
A dividend beneficiary can in practice be identified also as following: the domestic or foreign intermediary applies the provisions of the national legislation of their own country, including FATCA, CRS and DAC2 reporting standards, for finding out the beneficiary’s identity, country of tax residence, and having informed their client of the purpose of use of the information, requests the client's consent to deliver the information to the source country of the dividends, i.e. to the tax authorities of that country.
When identifying the beneficiary, the intermediary can utilize the identification and investigation procedure required for international exchange of information (governed by the FATCA/CRS/DAC2 rules) including the latest information collected pursuant to Anti-Money Laundering and Know Your Customer (AML and KYC) procedures. If the beneficiary’s identity has already been established for any of the purposes mentioned above and the beneficiary is identified as a Finnish tax resident or an account holder whose information must otherwise be reported to Finnish authorities, and the required information on the beneficiary is not delivered to the Tax Administration, the payor must withhold 50 per-cent tax on the dividends. Corporate entities must be treated as being Finnish tax residents if Finland is the country of their corporate registration. When identifying the dividend beneficiary, also the fact that the beneficiary is an account holder whose information does not have to be reported to Finnish authorities is worthwhile information: as a result, such a beneficiary can be treated as a nonresident. The Tax Administration may request additional information from the payor, who in turn, if necessary, may ask the intermediary who is acting on its behalf for the details on the procedure used to identify the dividend beneficiary.
It is common practice for intermediaries to hold the shares held by their nominee-account clients on one single account (also known as an omnibus account). In this case, the payor must have information on the existence of the omnibus account and on whether any shares owned by Finnish tax residents are held there. This means that any Finnish tax residents among the shareholders of shares recorded in the omnibus account must be specified for taxation purposes at the time when dividends are distributed; this must be done so that the payor may know whether the 50-percent rate of withholding must be applied on the dividend.
The dividend payor receives information through the custody chain from an unregistered intermediary (not registered as an AI) who has investigated and identified dividend beneficiary “A” for the purpose of international exchange of information, that "A" is a nonresident. In the process of identifying dividend beneficiary "A", the intermediary has made use of the information collected for FATCA/CRS/DAC2 reporting, and on the basis of which the intermediary has been able to verify that "A" is not an account holder who must be reported to the Finnish tax authorities. However, the intermediary cannot submit the identifying information of the dividend beneficiary to the dividend payor. In this case, the payor can rely on the information received from the custody chain and withhold 35 percent as tax at source on the dividend in accordance with § 7(2) of the Tax at Source Act.
The dividend payor receives information through the custody chain from an unregistered intermediary, who has investigated and identified dividend beneficiary “B” for the purpose of international exchange of information, "B" is a Finnish tax resident. The intermediary cannot pass the beneficiary’s identifying information on to the payor because the beneficiary has denied permission to do so. The payor does not have the identity information of the dividend beneficiary so the payor must withhold 50 percent tax on the dividend.
After the year of payment in the process of tax control, the Tax Administration requests the payor for a detailed account on its procedure regarding how the payor has verified at the time of payment that a dividend beneficiary unknown to the payor is not a Finnish tax resident. The payor provides a response stating that either the payor itself, or an unregistered intermediary acting on its behalf, has informed the intermediaries in the custody chain of the application of § 4 a of the Prepayment Act and related guidance issued by the Tax Administration. Simultaneously the chain has been informed, that Finnish citizens and Finnish companies cannot hold their Finnish shares in a nominee-registered account.
The payor has also agreed with the intermediaries, that the intermediaries go through their nominee-registered accounts at the time of payment to make sure that the accounts do not hold Finnish tax resident shareholders. The detailed account includes a confirmation from the intermediary, that the intermediary itself or the intermediary closest to the beneficiary in the custody chain has checked their nominee-registered accounts according to the procedures described in the Tax Administration's official guidance, and on the basis of which they have found there to be no Finnish tax residents among the dividend beneficiaries.
The aforementioned procedure is found acceptable to show that the payor has sufficiently investigated that the dividend beneficiary is not a Finnish tax resident.
An AI has collected an ISD from an account holder who is a customer of the AI and based on the ISD the dividend beneficiary's country of residence for tax purposes is Finland. The dividend beneficiary has not authorised the AI to submit their information to the Tax Administration or the dividend payor. The AI informs the dividend payor that the dividend beneficiary is a Finnish tax resident, but the AI cannot submit the identifying information to the payor. Because the dividend payor does not receive the identifying information of the dividend beneficiary, it has to withhold 50 per cent tax on the dividend.
An AI has collected an ISD from an account holder who is a customer of the AI and based on the ISD the dividend beneficiary's country of residence for tax purposes is Sweden. The AI verifies the reliability of the ISD in accordance with Tax Administration's ISD decision. The dividend beneficiary has not authorised the AI to disclose their information to the dividend payor or the Tax Administration. A tax at source of 35 per cent is withheld from the dividend in accordance with § 7(2) of the Tax at Source Act.
4 Completing the tax return, making payments
The dividend payor must report the amount of tax withheld on the dividends on the tax return on self-assessed taxes. The legal rules on the tax return on self-assessed taxes are found in Chapter 4 of the Act on Assessment Procedure of Self-assessed Taxes (Laki oma-aloitteisten veron verotusmenettelystä 768/2016). The self-assessed tax return must be filed electronically, at intervals according to the payor’s tax period. Self-assessed taxes are paid using the bank reference number for self-assessed taxes.
Read more about filing and paying self-assessed taxes:
Filing and paying self-assessed taxes
5 Completing the annual information return
Under § 15(1) and § 15 e(2) of the Act on Assessment Procedure and § 41 of the Tax Administration's decision on the general requirement to report information, a company that has distributed dividend must submit an annual information return containing the identifying information of the dividend beneficiary.
When it is a question of dividend paid to a nominee-registered share and the payor does not receive or cannot provide the Tax Administration with the information necessary for the tax assessment of a dividend beneficiary who is a Finnish tax resident, 50 per cent preliminary tax must have been withheld on the dividends. The dividend payor must report the dividends on an annual information return on dividends as described in the filing instructions of the return.
6 Making corrections to the tax
If it turns out that the amount of withholding on dividends was incorrect, the payor must adjust it during the payment year. The payor can make an adjustment of this kind in a situation where a tax at source has been withheld on the dividend, but later during the payment year the payor receives information that the dividend beneficiary was a Finnish tax resident at the time of payment. Another situation where the payor should make the adjustment would be when a preliminary withholding tax has been withheld on the dividend, but later during the year of payment the payor receives information that the dividend beneficiary was a nonresident at the time of payment (§ 10 and § 18, Tax at Source Act).
If the payor has incorrectly withheld 50 per cent preliminary withholding tax, the payor must adjust it to a smaller amount during the year of payment (§ 19, Prepayment Act). The adjustment can be made only when the beneficiary provides their identifying information to the payor before the end of the payment year. More information on how to make corrections to taxes withheld when the amount has been too high: Information on withholding (Ennakonpidätyksen toimittaminen, only available in Finnish and Swedish).
If the payor is unable to provide information to the Tax Administration on the Finnish tax resident dividend beneficiary and consequently, the payor cannot adjust the withheld amount during the payment year, the Finnish tax resident beneficiary can request the excessive withholding to be taken in account in the assessment of the beneficiary's annual income taxation after the payment year of the dividend. If a preliminary withholding tax has incorrectly been withheld on dividends paid to a nonresident, the nonresident can apply for a refund from the Tax Administration by using the application for refund of Finnish withholding tax on dividends.
If the dividend beneficiary is a Finnish tax resident but the payor has incorrectly withheld tax at source, the amount that was withheld incorrectly will be credited in the assessment of the beneficiary's annual income taxation for the benefit of the beneficiary.
The dividend payor withholds 50 per cent tax when paying dividend to a beneficiary who is a Finnish tax resident because the payor does not have the identity information on the beneficiary. However, a month after the dividend payment, the payor receives the identifying information of the dividend beneficiary from the custody chain. The dividend beneficiary is a natural person, so the payor performs an adjustment of the withheld tax and withholds 25,5 per cent of tax on the dividends as provided in § 15 of the Decree on Tax Prepayments and ensures that the beneficiary receives a document proving that the withholding is correct, as provided in § 35 of the Prepayment Act. The payor submits the identifying information of the dividend beneficiary to the Tax Administration on an annual information return.
The dividend payor has withheld 35 per cent tax at source on the dividend at the time of payment. After the time of payment, the custody chain informs the payor that the beneficiary is a Finnish tax resident. The payor does not receive the identifying information of the dividend beneficiary, which means that 50 per cent should have been withheld on the dividends. In this case, the payor must report the dividend as an amount paid to a Finnish tax resident on an annual information return on dividends.
If the payor succeeds in collecting the difference in withholding from the beneficiary, the payor can pay it on to the Tax Administration. If the payor does not correct the underwithholding on its own initiative, the Tax Administration will impose the missing amount of tax on the payor.
7 Neglected obligations of the dividend payor
Under the provisions of the Act on Assessment Procedure of Self-assessed Taxes, the company that distributed dividends is accountable for ensuring that the amounts withheld are correct, in light of the basis for tax assessment to be applied on the dividend beneficiary. If an amount was withheld and reported that is too low, the Tax Administration will impose the missing difference on the distributing company, under the provisions of § 40 of the Act on Assessment Procedure of Self-Assessed Taxes. The Tax Administration will also impose a tax penalty and late-payment charges on the distributing company.
If a company that has distributed dividend fails to submit an annual information return on dividends, submits it past the deadline, or submits it as incomplete or erroneous, the Tax Administration can impose a negligence penalty as referred to in § 22 a of the Act on Assessment Procedure
Head Tax Adviser Kalle Hirvonen
Tax Specialist Salla Madetoja