Hannes Snellman Counsel to a Client Receiving a Confirmation from the Supreme Administrative Court That a Capital Repayment Received from a US Subsidiary Will Not Be Taxed in Finland
20 September 2018
We previously wrote about our Tax team’s successful advance ruling proceeding at the Central Tax Board. The ruling was subsequently appealed, in part, by the Tax Recipients’ Legal Services Unit (in Finnish: Veronsaajien oikeudenvalvontayksikkö). The Supreme Administrative Court has now upheld the Central Tax Board’s ruling rejecting the argumentation of the Tax Recipients’ Legal Services Unit and resolving the matter in our client’s favour.
In the circumstances at hand, the US subsidiary of our client, a Finnish listed PLC, plans to make a capital repayment from its additional paid-in capital. In Finnish taxation, this capital repayment would, as a main rule, be treated as a return of non-restricted equity, which, under the circumstances of the case, would be fully taxable as a foreign source dividend at the Finnish corporate income tax rate of 20 per cent under the provisions of domestic tax laws.
However, the Central Tax Board and the Supreme Administrative Court accepted our argumentation and held that the capital repayment is exempt from Finnish tax. The ruling is based on a participation exemption on dividends provided for in Article 23(b) of the US-Finland Tax Treaty. In fact, as capital repayments are in Finland taxed as dividends, the exemption under Article 23(b) applies even if the US characterised the payment as a capital gain (Article 13) and not as a dividend (Article 10) for treaty purposes. The ruling is of particular significance for multi-national groups of companies and in relation to the many countries with whom Finland has a tax treaty with a similar participation exemption.