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15 January 2015
Global Tax Alert
News from EU Tax Services
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Finnish Supreme
Administrative Court
holds dividends to a US
RIC exempt from Finnish
withholding tax based on EU
free movement of capital
Executive summary
On 13 January 2015, the Finnish Supreme Administrative Court (the Court)
rendered its decision on a case considering the withholding tax treatment of
dividends distributed by Finnish listed companies to a US resident regulated
investment company (RIC). The Court confirmed that dividends payable to a US
resident recipient should be exempt from withholding tax where the dividends
would be tax exempt when paid to a Finnish comparable resident recipient under
the European Union (EU) principle of free movement of capital of Article 63 TFEU
(Treaty on the Functioning of the European Union).
Detailed discussion
The case addressed the withholding tax treatment of dividends distributed by Finnish
listed companies to a US resident Delaware Statutory Trust, a closed-end regulated
investment company (RIC). The shares of the RIC were listed on the New York stock
exchange. The RIC had applied for an advance ruling from the Finnish Central Tax
Board primarily on the question of whether the RIC may be deemed comparable to a
Finnish mutual fund for withholding tax purposes and the dividends hence exempted
from withholding tax. Finnish mutual funds are considered as separate tax subjects;
however, the funds are specifically tax exempt from income tax under a Finnish
domestic law provision. The Central Tax Board ruled in the first instance, that the
dividends paid to the RIC should be subject to a withholding tax, as the RIC could
not be deemed comparable to a
Finnish mutual fund. The ruling was
appealed to the Court.
Finnish law only recognizes mutual
funds established on a contractual
basis and the Finnish mutual funds
have no separate legal personality,
whereas the RIC is a separate
legal entity. The Court recognized
certain legal and functional
similarities between a Finnish
mutual fund and the RIC, yet the
Court concluded that the RIC is
objectively comparable to a Finnish
limited liability company instead of
a Finnish mutual fund.
As the RIC was deemed comparable
to a Finnish limited liability
company, no withholding tax on
dividends distributed by Finnish
listed companies to the RIC could
be levied pursuant to the principle
of free movement of capital, as
the dividends would have been
exempt from tax for a Finnish listed
recipient and tax treaty provisions
on the exchange of information
were in place between Finland
and the state of residence of the
dividend recipient.
Implications
The Court confirmed that the
EU principle of free movement
of capital precludes levying
withholding tax on dividends paid
to recipients established in nonEU member states, where the
dividends would be tax exempt in a
corresponding domestic situation.
Thus, foreign investment funds
together with publicly traded
investment companies, both EU and
non-EU residents may be entitled
to receive Finnish-source dividends
exempt from withholding tax,
provided that sufficient comparability
may be deemed to exist.
The case also offers guidance
on the factors affecting the
comparability of the foreign entity
to a Finnish domestic entity. The
Court highlighted the importance
of the legal form as it deemed the
RIC comparable to a Finnish limited
liability company, even if it stated
that the functional analysis would
have supported comparability to
a Finnish mutual fund. In previous
case law, a SICAV (investment
company with variable capital) has
been regarded as comparable to a
Finnish limited liability company and
contractual funds as comparable to
a Finnish mutual fund.
The statute of limitations for
withholding tax purposes is five
years under Finnish law. Hence
foreign funds may apply for a
refund of withholding taxes levied
in 2010 or later. A foreign fund may
also apply for an advance ruling on
the withholding tax treatment of
Finnish source dividends to confirm
the withholding tax treatment of
dividends in advance.
For additional information with respect to this Alert, please contact the following:
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
• Dr. Klaus von Brocke +49 89 14331 12287 [email protected]
Ernst & Young Oy, Helsinki
• Kennet Pettersson • Tomi Viitala • Laura Lahdenperä 2
+358 40 556 1181 +358 45 773 12025 +358 50 364 1013 [email protected]
[email protected]
[email protected]
Global Tax Alert EU Tax Services
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