The taxation of dividends was changed to an imputation system in 1990. Under the imputation system, domestic shareholders receive a tax credit for the full amount of the corporate tax paid on distributed dividends. However, domestic tax-exempt entities, such as investment funds, employee investment funds and charitable organisations, are not eligible for the imputation credit.

A resident company receiving dividends from another resident company includes cash dividends received and an imputed tax credit equal to the amount of the computed tax in its taxable income. The imputed credit is subtracted from the recipient company's corporate income tax liability. An excess credit is not is refunded in cash but can be used against future taxes.

Under the imputation system, the amount of tax to be credited to a resident shareholder is computed based on a fixed corporate tax rate. The fixed rates and corresponding credits are listed in the following table.

               Corporate Tax Rate            Credit On
        Tax Year                  %          Cash Dividend Received

          1992                    36                  9/16

          1993-1995               25                  1/3

          1996                    28                  7/18

An imputed tax credit is granted regardless of whether the company's income was actually taxed at the presumed full 28% rate. The effective rate actually paid may be lower if the company received income that is wholly or partially tax-exempt. The minimum tax, discussed in the next paragraph, will ensure, however, that the effective tax rate for the distributed profit will be increased to 28% (1996).

A minimum tax has been incorporated into the system to ensure that shareholders are not credited with more tax than has been paid. The method used in Finland differs from that used elsewhere. The distributing company computes a tentative corporate tax (28% in 1996) on its taxable income and also a minimum tax of 7/18 (in 1996) of its dividend distribution. If the minimum tax exceeds the tentative corporate income tax liability for the tax year, the corporation has to pay the difference as a supplementary tax. To ensure that the distributing company's income will not be taxed twice, tentative corporate taxes not used to pay for minimum taxes may be carried forward for 10 years.

Non-resident shareholders are not eligible for the imputed tax credit, except if a tax treaty provides otherwise. Treaty provisions grant a partial imputation credit for UK and Irish residents. Imputation credit has to be applied from the municipal tax office. Permanent establishments of foreign companies in Finland should however be entitled to a dividend imputation on those shares that belong to the permanent establishment. There is no jurisdiction about the matter but this interpretation comes from the EU-court decisions.

The content of this article is intended to provide general information to the subject matter. It is therefore not a substitute for specialist advice.

For further information please contact Mr. Jukka Nisonen +358 0 1727 7282, Tilintarkastajien Oy - Ernst & Young, Kaivokatu 8, 00100 Helsinki, Finland or enter a text search 'Ernst and Young' and 'Business Monitor'.