The taxation of dividends will be changed by the amendments to the Parent-Subsidiary Directive

By Sami Tuominen


The Finnish government has proposed the amendments to the Business Income Tax Act in order to meet the requirements of the Parent-Subsidiary Directive. The amendments are aimed to prevent misusing benefits of dividend taxation and to restrict aggressive tax planning.

At the moment dividend distributions from unlisted company to another unlisted company are widely exempt from tax in Finland. The current exemption is large and independent of whether the dividends are deductible on the payer's side. The exemption from tax on dividends in the Finnish legislation is even larger than what is required in the Parent-Subsidiary Directive. The recently proposed amendments will now restrict the exemption when the dividends paid can be deducted in the payer's taxation. The amendment will have an impact, first of all, on the different kind of so called hybrid transactions where the dividends paid are treated as deductible for the payer even though they are tax free for the payee. The payee receiving the dividends will be obliged to clear up whether the dividend is deductible in the payer's taxation.

In addition, the general anti-abuse provision is proposed to be included in the regulation of dividend taxation in the Business Income Tax Act. The provision could be applicable to the artificial transactions in which at least one of the main reasons for such a transaction is to achieve the tax benefit contrary to the nature of the exemption provision. If the anti-abuse provision is applied, the dividends are considered as fully taxable income.

According to the proposal, the legal changes will come into force in the beginning of 2016 and be first time applicable to fiscal year 2016. This means that companies, whose current financial year ends within 2016, may already have received dividends which can be defined as taxable income. It is advisable to take the potential impact of the amendments into account, if your company receives dividends from abroad.