TAX NEWS - 2010

Finland Tax: Tax working group proposes changes to Finland tax system

A tax working group established by the Ministry of Finance to analyze possible changes to the Finnish tax system released its interim report on 21 June 2010. The group proposes a modest shift of emphasis from corporate taxation to personal-level capital income taxation and from taxation on work to taxation on consumption.

The most important proposals are as follows:

- Reduce Finland corporate income tax rate to 22% (currently 26%). To maintain the broad corporate tax base, no changes are proposed. The group rejected a proposal for an innovation incentive on the grounds that the reduced corporate income tax rate would provide a sufficient incentive for companies. The group suggested further examination of possible limitations to interest deductions.

- Increase the standard capital income tax rate of individuals, including the withholding tax rate on interest income, to 30% (currently 28%).

- Tax dividends received by individuals from publicly listed companies in full as capital income (currently 30% of such dividends are exempt). Abolish the tax exemption for dividends received by individuals from unlisted companies and replace the exemption with reduced taxation of the normal return on the dividends. As a result, 35% of dividends corresponding to the normal return would be taxed as income from capital and dividends exceeding the normal return would be taxed fully as income from capital. The normal return would be calculated on the basis of the company's net assets and an interest rate to be confirmed annually.

- Increase the VAT rates by two percentage points, so that the standard rate would be 25%, the rate on food supplies and restaurant services would be 15% and the other reduced rate would be 11%.

The working group will release a final report before the end of 2010 (when its mandate expires) in which it will make an overall assessment of the development needs of the Finnish tax system, particularly with respect to earned income taxation, excise taxation, inheritance and gift taxation and real estate taxation. The proposed changes then will be subject to the political decision-making process. No legislative changes are expected before 2012 or 2013, also taking into account the parliamentary elections scheduled for spring 2011.