Tuesday, November 25, 2014

Notes on taxation of foreign dividends in Finland

Over the years we have held securities from numerous foreign companies. It has become evident that there are huge differencies on how dividends are taxed in Finland. Cumulative taxes paid on dividends can vary from 25,5% to 55,5% (or more!) depending on the case.

For Finnish investor like myself, the following parameters needs to be obverved
  • country (or in worst case countries) where the investor is taxed
  • country (or countries) where the investor has brokerage account(s)
  • country of incorporation (home country of the company)
  • where company is listed
In Finland, tax on capital gains and dividends is 30% up to 40.000 euros (2015: 30.000 euros) after which it's 32% (2015: 33%). However, 15% of dividend is tax free and this applies to foreign as well as to domestic stocks (corporations listed in a stock exchange) as long as the country of incorporation is:
  • an EU country
  • a country with which Finland has a double taxation treaty (like USA)
Typically dividends are double taxed in "source" and "destination" countries. Here is where the double taxation treatys come in play - in most cases. The problems arise from case where more is withheld than assumed under the tax treaty. In those cases, the only way is to apply for a refund from the tax authorities of the country concerned.

The problematic cases I have encountered so far:
  1. France: withhelds more than assumed under tax treaty with Finland.
  2. Hong Kong: does not have tax treaty with Finland. Dividends are treated as regular income, which is progressively taxed in Finland (can go beyond 50%).
  3. British companies listed in USA: you might end up being withheld 15% while tax treaty assumes 0%.
(1) I have read also Germany, Switzerland and Denmark withhelds more than assumed in tax treaty with Finland.
(2) Any "tax haven" falls into same gategory than HK. E.g. Bermuda where many companies are incorporated even if otherwise clearly European or U.S. companies.

While the above is directly applicable only in Finland, I would assume that an investor in any country might encounter these type of cases. Recommend to check these issues upfront. In many cases I didn't and payed price for it.

Wednesday, October 29, 2014

Fred Olsen Energy dives into the deep end of the pool

Fred Olsen Energy (Oslo: FOE), like the whole offshore drilling industry, has been hammered this year. In last couple of days FOE has been diving because of worse than expected quarterly report. To date it has clearly performed worse than most of it's peers listed in Oslo and New York.

In March this year, we tripled our position in this stock. Now it's our worst performing stock. Luckily, rest of the portfolio has performed better than the market, so despite of FOE moving to wrong direction, we might beat the market as much as 10%. However, it's still two months to go and anything can happen.

With regards to FOE, I'm not able to pinpoint any fundamental reason why FOE is performing worse than peers.

Any ideas from readers?

Thursday, October 2, 2014

Siili Solutions in - Valmet out

I have made two changes in our portfolio:
  • Siili Solutions was added
  • Valmet was removed
Valmet came to our portfolio for demerger of Valmet from Metso. As said then, then plan was to allow hidden value of the companies to unlock and then make decisions. The decision was between accumulate or sell and I chose latter.

Apart from some very risky positions that we have, I want rest of the positions to be meaningfully large to make a difference. Also, I want to keep the overall amount of companies at a level that I can manage to follow with some regularity.

Siili Solutions is a small Finnish IT company. They are listed at NASDAQ OMX First North Finland, which is an alternative market, operated by the different exchanges within NASDAQ OMX. It does not have the legal status as an EU-regulated market. Companies at First North are subject to the rules of First North and not the legal requirements for admission to trading on a regulated market. The risk in such an investment may be higher than on the main market.

The company has appeared regularly in my screens at the top, has good profitability and above all - potential to grow. Given most of the companies we hold are defensive and/or very large, it was time to inject a growing company into the portfolio even when it means also increasing risk for losses.

Inderes has made a thorough analysis of the company, but it's available only in Finnish (link). However, people from same company summarized their rationale when selecting the company to their expert porfolio in May 2014 - only a week after releasing the analysis linked above.

The company has been trading recently around 13,6 euros and is around all time highs. Lowest price within 1 year period is around 8 euros and before the above mentioned analysis and recommendations the company was trading at 11 euros. This should be taken into account when reading the above linked analysis.

Liquidity with the company is rather low even for individual non-professional investors like me. Thus, I had to aquire the shares we now hold over multiple days and even then I managed to increase price on several occations.

I believe the company is now fairly valued by market (and we bought with that valuation). We are in for the long run and hoping the company will deliver profitable growth, which is the key thesis to own the company.

The writer owns shares in Siili Solutions.

Sunday, August 31, 2014

Russia, Finland and stocks

Russia has been in news lately a lot due to the situation in Ukraine. Tensions are rising also in the north as Russia has repeatedly violated Finnish airspace over a short period of time. On friday, Finnish Air Force moved F-18 fighters to locations closer to Gulf of Finland where violations have taken place. Testing, teasing or just plain ignorance from Russian pilots. How knows. Some talk about echos of Cold War.

We in Finland share 1300 kilometers (800 miles) of border and a long history with Russia. They are one of our our most important trade partners, and therefore, the current crisis and sactions placed by EU and Russia to each other are bad news for already stagnant Finnish economy. Overall, the relationship between Finland and Russia is good. However, Finland as member of EU clearly has chosen its side in the crisis.

Many Finnish companies listed in Helsinki stock exchange generate considerable revenue from Russian operations:
  • Oriola-KD 38%
  • Nokian Renkaat (Nokian Tyres) 35%*
  • Aspo 32%*
  • Tikkurila 31%
  • YIT 27%
  • Honkarakenne 27%
  • Nurminen Logistics 20%
  • Raute 20%*
  • Fortum 19%
  • Stockmann 17%
*) Reporting includes also other countries than Russia from Commonwealth of Independent States (CIS)

Source: Arvopaperi magazine August 2014

The crisis has already impacted valuations of many of these companies. Maybe good opportunity to buy - maybe not. We don't have stake in the above mentioned companies other than in Fortum.

Russian stock market itself seems dirt cheap:
  • P/E 5
  • dividend yield around 5%. 
 Source: Arvopaperi magazine August 2014 (Factset, Economist)

We don't have much of a exposure to Russia at this point and I intend to keep it that way for time being. It's currently hard to see how things can get "normal" between West and Russia for some time.

Monday, June 30, 2014

How nuts is our allocation

"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors." - Warren Buffett

The asset allocation suggested by Warren Buffett in his 2013 letter to shareholders of Berkshire Hathaway is quite similar to "Aggressive Investor" profile in AAII Asset Allocation Models. The biggest difference is that in AAII models and many others, it is recommended to dial down risk with the remaining investment horizon.

Vanguard offers historical Risk/Return (1926–2013) for each of their portfolio allocation models.

100% bonds

Average annual return: 5.5%
Best year (1982): 32.6%
Worst year (1969): –8.1%
Years with a loss: 14 of 88

100% stocks

Average annual return: 10.2%
Best year (1933): 54.2%
Worst year (1931): –43.1%
Years with a loss: 25 of 88

That's historical perspective to risk vs. return.

One particular rule I have come across says that allocation to stocks should be 100 minus your age. I guess it depends on whether you are going to ultimately sell stocks to cover expenses or not. Because if you are not, then why move money from stocks to bonds - especially from the dividend paying kind?

I like Warren's advice for three reasons: For its stock vs. bond allocation, its simplicity and for the use of low cost index fund. In fact, I should probably benchmark myself to his advice in addition to my selected benchmark index.

Our own allocation is close to 100% stocks allocation so it is near the extreme end of asset allocation models discussed here. I feel good about it, but we also have very high risk tolerance with the money invested. I personally think people who take sure loss after inflation are nuts (i.e. people who park money to bank accounts or low yielding bonds).