TAX NEWS - 2010

European Union Tax: Finnish dividend withholding tax legislation referred to ECJ

Following comparable cases regarding Portugal and Spain, the European Commission has referred Finland to the European Court of Justice for its dividend withholding tax legislation on distributions to EU pension funds.

Dividends paid to nonresident pension funds are subject to a 19.5% dividend withholding tax on the gross amount of the dividends, whereas dividends paid to Finnish resident pension funds are subject to a different regime, i.e. no withholding tax is levied, but 75% of the dividends received by the pension fund are taxed at the 26% corporate income tax rate.

While in principle dividends received by Finnish pension funds also are taxed at a rate of 19.5% because the corporate income tax is based on net rather than gross income, such distributions are effectively taxed at a rate lower than 19.5% and, therefore, lower than dividend distributions to nonresident pension funds.

According to the European Commission, this different treatment constitutes an infringement of the free movement of capital and should be amended, at least to the extent it concerns dividend distributions to EU/EEA pension funds.