1. KHO:2008:23 Finnish Dividend Taxation of EU Individuals

2. Agenda The Case briefly Legislation applied in the case Different solutions options Summary & aftermath

3. The Case in Short: KHO 2008:23 Person A Moved to Great Britain in 2002 Limited tax liability to Finland from 2006- Owns 35 % of Company S shares Company S Oy Not listed Pays Person A’s dividends to Finnish bank account, dividends not transferred onwards to UK Dividend should be taxed according to tax treaty between Finland and UK → in Finland Dividend Taxation In 2005 Person A still had unlimited tax liability to Finland → dividends were taxed according to Finnish income tax law Now he has limited tax liability → taxation changed Problem Dividends were taxed according to Act on Taxation of Income and Wealth of a Person with Limited Tax Liability (lähdeverolaki) The Central Tax Board (keskusverolautakunta) gave a preliminary ruling that differs from the above mentioned law The State official representing the interests of tax recipients (veroasiamies) did not agree with the preliminary ruling and had different views on how the dividend should be taxed

4. Legislation Income Tax Law 33 b §: 1-2. Act on Taxation of Income and Wealth of a Person with Limited Tax Liability 2§, 3:1 §, 7 § UK/Finland Double Taxation Convention: Article 6 and Article 11, paragraph 1. The Treaty on the Functioning of the European Union Article 18, Article 43 and Article 56

5. Legislation: Dividend Taxation in Finland NB: in 2007 Income Tax Law 33 b § Act on Taxation of Income and Wealth of a Person with Limited Tax Liability 3:1 §, 7 § Does the dividend exceed 9 % of the mathematical value of the share? Does the dividend exceed 90 000 €? Tax exempt Exceeding part: 70 % capital gains 30 % tax exempt Exceeding part: 70 % earned income 30 % tax exempt No Yes The rest Unless otherwise regulated, dividend paid to a person with limited tax liability is subject to withholding tax. The tax is withheld from the full amount of dividend irrespective of regulations concerning taxation of dividends in other tax legislation. The withholding tax rate is 28 %. Person with Unlimited Tax LiabilityPerson with Limited Tax Liability

6. Legislation : UK/Finland Double Taxation Convention Article 11, paragraph 1: Dividends paid by a company in a contracting state to a resident of the other contracting state shall be taxable only in that other state Article 6: Tax relief is only applied to income that is remitted to or received in the United Kingdom  Taxing right is shifted to Finland

7. Legislation: The Treaty on the Functioning of the European Union According to EC treaty article 43 restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. According to EC treaty article 56 all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited. According to EC treaty article 18 every citizen of the Union shall have the right to move and reside freely within the territory of the Member States

8. Taxation Options Reviewed Options 1) Preliminary ruling from the Central Tax Board (Keskusverolautakunta) 2) The option under the tax agent's alternative claim, Preferred option (Veroasiamiehen ensisijainen vaatimus) 3) The option under the tax agent's alternative claim, Secondary option (Veroasiamiehen toissijainen vaatimus)

9. Taxation Options Reviewed: 1) Preliminary ruling from the Central Tax Board Proposal: No tax should be withheld if dividends don’t exceed 90 000 € or 9 % of the mathematical value When the dividends exceed 90 000 € or 9 %: Tax should be withheld from 70 % of the exceeding amount – withholding tax rate of 28 % should be applied 30 % should be tax exempt The tax base comes from Income tax law, tax rate from Act on Taxation of Income and Wealth of a Person with Limited Tax Liability Reasoning: A person with limited tax liability and a person with unlimited tax liability are in an objectively comparable situation when it comes to capital gains Based on freedom of establishment and free movement of capital a person with limited tax liability shall not be taxed more heavily than a person with unlimited tax liability for the dividends

10. Taxation Options Reviewed: 1) Preliminary ruling from the Central Tax Board (cont’d) Decision of the Supreme Administrative Court: The ruling is not compliant with Finnish withholding tax legislation Application of a flat 28 % tax rate is simple and easy to implement  This should, however, not be the basis for applying the above mentioned taxation Due to lack of regression in taxation a person with limited tax liability might end up paying less taxes than a person with unlimited tax liability  This, however, is not against EU law, unlike a reverse situation would be Even though this ruling is taken further than necessary in order to make sure it is not discriminatory, this is the only option that is technically applicable and is not discriminatory towards persons with limited tax liability

11. Taxation Options Reviewed: 2) The option under the tax agent's alternative claim, Preferred option Proposal: All dividend income subject to withholding tax 28 % of the total amount of the dividend Reasoning: The method of calculation is legally justified, if it is considered that The Withholding tax alone governs this issue Tax exempt share should not be The tax rate should be always the same flat tax rate, maximum 28 % -> This option would be the easiest to implementation Legally this option may be discriminatory: Limited taxable income would be taxed, in some cases significantly more severe than the general taxpayer's income because of any deductions or free parts can not be granted Decision-making of the Supreme Administrative Court: A Taxing less favorably than a comparable situation a shareholder resident in Finland is contrary The end result would probably lead to contrary to the EC's Art. 18 and Art. 56 and Art 43

12. Taxation Options Reviewed: 3) The option under the tax agent's alternative claim, Secondary option Proposal: All dividend income subject to withholding tax 28 % of the total amount of the dividend If withholding tax exceeds the amount that would be subject to with unlimited tax liability to Finland, the exceeding amount of tax will not be withheld  it would be withheld and application should be submitted after tax year in order to credit the exceeding amount Reasoning: Option is a pure-bred and rear limited-discriminatory tax treatment of a taxable person legal point of view and implement Finland the power to tax The amount of the tax is exactly the same as the person with unlimited tax liability The problem is the time lag of taxation: The amount of the tax would be determine always in arrears It would be at the same time sort of tax withholding, that generally do not apply to taxpayers Technical difficulties do not cause, at least not permanently in more severe taxation Some of the technical difficulties are time-related, but in any case, at some point have to check whether a limited taxpayer receiving all or almost all of his income from Finland If the similarity of standard treatment are set high, this method of calculation may be discriminatory

13. Taxation Options Reviewed: 3) The option under the tax agent's alternative claim Secondary option Decision-making of the Supreme Administrative Court: The total amount of the dividend shall be charged to 28 % withholding tax If withholding tax exceeds the amount that would be subject to with unlimited tax liability to Finland, the exceeding amount of tax will not be withheld  it would be withheld and application should be submitted after tax year in order to credit the exceeding amount. This withholding tax is fiscally non-discriminatory The result is a tax corresponding to the dividend tax in domestic conditions Difficult to implement To calculate the correct amount of tax also will be a delay, because the amount can be reconciled only after the event via the payment or refund of the application This option brings the dividend payer and withholding tax subject to the obligation to recover the duties that it is impossible to be fulfilled in practice Option does not meet the EC’s legal requirements about the prohibition of restriction The end result would probably lead to contrary to the EC's Art. 18 and Art. 56 and Art 43

14. Summary: Options Reviewed Amount of dividends Below 9 % of mathematical stock value and below 90 000 € Below 9 % of mathematical stock value but over 90 000 € Anything exceeding 9 % of mathematical stock value Applied to a person with unlimited tax liability Tax exempt70 % subject to capital gains tax (rate in 2007: 28 %) 30 % tax exempt 70 % subject to earned income tax (progressive) 30 % tax exempt Preliminary ruling from the Central Tax Board (keskusverolautakunta) Tax exempt70 % subject to withholding tax (rate in 2007: 28%) 30 % tax exempt Views of the State official representing the interests of tax recipients (veroasiamies) Preferred optionAll dividend income subject to withholding tax (rate in 2007: 28%). Secondary optionAll dividend income subject to withholding tax (rate in 2007: 28%). If withholding tax exceeds the amount that A would be subject to with unlimited tax liability to Finland, the exceeding amount of tax will not be withheld  in practice, it would be withheld and application should be submitted after tax year in order to credit the exceeding amount. 1 2 3

15. Changes in legislation: The legislative initiative into law of the Income Tax § 33b the amending The impact of the application of the law on taxation of limited taxable income limited (Withholding tax law) Allow previously the source of overpaid tax return of the taxpayer Withholding tax shall apply to non-resident natural persons domiciled in the European Economic Area A tax levied on dividends would not in fact full credit for the dividend recipient's State of residence of an agreement between Finland and the Member State of residence to eliminate double taxation on the basis of an agreement Limited received the taxpayer's dividend income would be taxed in accordance with the principles of the Income Tax