EU court slams Finnish corporate tax rebates
The Court of Justice of the European Communities handed down a ruling on Tuesday that the Finnish system of rebates on corporate taxes is illegal.
The decision is somewhat redundant, because a reform of corporate taxation, which was passed in the summer and comes into effect at the beginning of next year, removes the rebate. The change has led many companies to hand out more dividends.
The ruling is expected to lead to a number of appeals concerning the taxation of years past.
According to the decision handed down in Luxembourg, the rebate system implemented by Finland is an obstacle to the free movement of capital.
The EU court gave its ruling at the request of the Finnish Supreme Administrative Court, which is handling a case concerning the dividends of the telecommunications service provider Telia.
The merger of the Swedish Telia and the Finnish company Sonera brought Telia many Finnish shareholders, one of whom initiated a court case over the taxation of the dividends paid by Telia.
Under earlier Finnish tax law, someone living in Finland who receives dividends from a Finnish company has not had to pay taxes on the income.
The notion of rebates refers to the fact that the taxes paid by the company itself for its result have been seen to cover the shareholder, and the tax-free status of the income has been seen as a way to avoid double taxation.
Only remnants of the rebate system remain in some EU countries, such as Spain and the UK. France is one of the most recent countries to abandon the system.
An argument raised during the debate on giving up the rebate system involved concern over the future of Finnish corporate ownership. However, the official defence of the system focused on consistency in the taxation system.
The different treatment of Finnish and foreign owners also meant that Finnish shareholders faced extra taxation when the domicile of a Finnish company moved abroad.
For instance, when Merita-Nordbanken, which later became Nordea Bank, was placed under the Swedish flag, Finnish shareholders suddenly had to start paying taxes on their dividends.
Taxation expert Pauli K. Mattila of Finland’s Central Chamber of Commerce says that it will be interesting to see how the decision is reflected in appeals arising from taxation decisions made previously.
Finnish shareholders of Nordea and Telia are likely to be among those seeking restitution.
Mattila believes that the amount of money that the Finnish state will have to pay back will probably be "in the millions, but not in the hundreds of millions".