Central Tax Board to Confirm the Tax Exemption of a Capital Repayment from a US Company
18 September 2017
Our Tax & Structuring team has assisted one of our clients in yet another successful advance ruling proceeding. The US subsidiary of our client, a Finnish listed PLC, plans to make a capital repayment from its additional paid-in capital. In Finnish taxation, this capital repayment would, as a main rule, be treated as a return of non-restricted equity, which, under the circumstances of the case, would be fully taxable as dividend at the Finnish corporate income tax rate of 20 per cent under the provisions of domestic tax laws.
However, the Central Tax Board accepted our argumentation and held that the capital repayment is exempt from Finnish tax. The ruling is based on a participation exemption on dividends, provided for in Article 23(b) of the US-Finland Tax Treaty. In fact, as Finland taxes the capital repayment as dividend, the exemption under Article 23(b) applies even if the US characterised the payment as a capital gain (Article 13) and not as a dividend (Article 10) for treaty purposes. The ruling is of particular significance in relation to the many countries with whom Finland has a tax treaty with a similar participation exemption.
Our application for advance ruling also included another question with regard to which the Central Tax Board confirmed that the rules concerning the taxation of returns of non-restricted equity also apply after the recipient company has merged into another company. Under these rules, a return of non-restricted equity from a non-listed company may, under certain circumstances, be taxed as a capital gain instead of the typical taxation as dividend.