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.