Finland's new Government published its programme on 17 June. It includes taxation initiatives aimed at strengthening economic growth and employment, promoting social justice and creating more environmentally sound consumption and production patterns. To promote employment and to ensure that Finnish companies remain competitive and have incentives to invest, the Government will cut the corporate income tax rate. At the same time, the Government will see to it that the taxation of earned income will not become stricter. The proposed changes to taxation are not as significant as originally believed.
Changes in the Taxation of Limited Liability Companies and Their Shareholders
In corporate taxation, the most important change is the lowering of the corporate income tax rate to 25% from the current 26%. In addition, according to the programme, the Government will follow the development of corporate tax rates in competing countries and take measures where necessary to guarantee Finland's competitivity on the international level. The tax treatment of repayments of capital from the reserve for in-vested unrestricted equity will be written into legislation in its current form. At the moment, repayments made from this reserve are treated in taxation either as refund of capital or profit distribution , depending on the funds that are used.
Changes to the taxation of dividends will be less significant than predicted. The tax exempt amount of divi-dends paid by an unlisted company to a private person will be reduced to EUR 60,000 from the current EUR 90,000. The taxation of capital income will be increased through raising the tax rate and through introducing two levels of tax rates. The rate will rise from 28% to 30% and, for capital income exceeding EUR 50,000, to 32%. As the taxes paid by private persons on their capital income increase, so will the taxes paid by share-holders in unlisted companies with strong balance sheets.
Study on the Reform of Business Taxation
The changes to the corporate income tax and the taxation of profit distributionwill shift the emphasis from the taxation of company income into the taxation of shareholders.
Another significant change in corporate taxation will be the extensive study on the reform of business taxa-tion to be commissioned right at the beginning of the Government's term. The study is to investigate, among other things, the reform of the tax regime concerning groups of companies, the possibility of abolishing the categorisation of income sources, the tax deductibility of interest, the extension of the scheme on the fiscal carry-forward of losses, the opportunities for allowing tax deductions and the need to extend the scheme on increased depreciation of productive investments. In addition, the government programme states that the opportunities for introducing a specific deduction for research and development expenses will be examined forthwith. We will keep track of the progress of these reforms and inform you about any changes so that your company can prepare for them as early on as possible.
Focus on the Financial Market
In the aftermath of the financial crisis, the programme proposes that Finland should introduce a tax on banks, aiming primarily at a solution on the EU level. Furthermore, Finland will expedite the introduction of an international tax on the financial market (the so-called transaction tax). As regards the financial market tax, a global solution is the objective. The programme does not include further details on the rate or scope of the bank and financial market taxes. Nevertheless, to maintain Finland's competitivity, it is essential that neither of these taxes get implemented on the national level only.
Indirect Taxes Will Affect the Cost Structures of Companies
The most significant changes to taxation proposed in the programme have to do with indirect taxes. During its term, the Government will implement, among others, the following changes:
- introducing a windfall tax in the energy industry
- increasing the tax on transport fuels
- raising the vehicle tax
- raising excise duties
- including newspaper and magazine subscriptions in the scope of VAT (tax rate 9%)
- increasing modestly the tax on peat.
Combating the Shadow Economy Will Increase Administrative Costs in Companies
In addition to the above, the programme highlights the losses incurred by society due to the shadow economy. To combat it, the Government will appoint a ministerial working group, with representatives from all administrative branches. Due to the efforts for tackling the shadow economy, the construction industry will see its obligations increase. At construction sites, a tax number will be included in employees' obligatory photo ID card. In addition, construction companies will have to report their employees and contracts to the Finnish Tax Administration on a monthly basis.
Timing of Changes Not Yet Known
The programme does not specify a schedule for the implementation of the reforms included in it. If carried out as fast as possible, the changes to tax rates could enter into force at the beginning of 2012, if they were to be implemented in connection with next year's budget as so-called budget acts. The more substantial reforms in business taxation will likely be implemented towards the end of the Government's term of office.