The Finnish government has agreed on spending limits for the years 2014–2017.
Corporate Income Tax Lowered, Tax Base Expanded
The corporate income tax rate will be cut from 24.5% to 20%. The new tax rate is planned to become effective as of 1 January 2014. This reduction will however be paired with an extension of the tax base, achieved by restricting the right to deduct interest expenses and removing the right to deduct representation expenses.
Taxation of Capital Income Increased
Capital income up to EUR 40,000 will be taxed at 30% and the amount exceeding this limit at 32%. Currently, the progression threshold is EUR 50,000.
Significant Changes to Taxation of Dividends Paid to Individuals
The taxation of dividends paid to companies will remain unchanged.
Dividends paid to individuals will in the future be treated as capital income in all cases. In other words, they will no longer be divided into capital income and earned income. Also the tax exemption for dividends falling below a certain threshold – currently, EUR 60 000 – will be eliminated.
Dividends paid by listed companies will become subject to tax in their entirety. Currently, only 70% of such dividends are treated as taxable capital income.
As regards non-listed companies, 25% of dividends will be capital income subject to tax up to the amount corresponding to an eight-percent annual rate of return on the mathematical value of the shares. The amount exceeding this threshold will be taxable as capital income in its entirety. The threshold has only been set as a percentage, not as a euro amount.
Together, these changes shift the focus of taxation from the company’s result to the shared profit, especially in smaller companies. The total tax burden on individuals who receive dividends from unlisted companies will vary from approximately 24% to over 45% in the new system. It may also make obtaining listing on a stock exchange less attractive for unlisted companies with a solid financial position.
In the table below, we have collected some examples of the impact on the total tax burden on individuals who receive dividends from unlisted companies. The calculations are based on the assumption that the company has a sole shareholder whose capital income consists exclusively of the dividends paid by the company. As regards the current system, the earned income tax rate used in the calculations is 40%.]
Click here to view table.
The changes in taxation of dividends are planned to become effective as of 1 January 2014.
- The excise duties on sweets, alcohol, electricity and tobacco products will increase, whereas the value added tax rates will remain unchanged.
- The tax concession for research and development activities will only be available until the end of 2014, instead of 2015. Similarly, the right to make double depreciations will only be available until the end of 2014.
- Depreciation on long-term investments will be itemised.
- In income taxation, the earned income allowance and low-income allowance will increase, and the maximum amount of the domestic help deduction will increase to EUR 2,400.
- The right to deduct interest on mortgages will be restricted. From the beginning of 2015, only 70% of interest expenses will be deductible. The right to deduct interest on student loans will cease.
- Windfall taxation will be decreased.