Finnish withholding tax (WHT) on dividends paid by Finnish listed corporations will change significantly from 2021. A criticized reform will abolish the current so-called ‘simplified procedure’ for nominee-registered shares that has secured a lower 15% WHT on most dividends paid to non-resident shareholders in tax treaty jurisdictions. Abolishing the current regime means that Finnish-source dividends may be subject to Finnish WHT at a rate of 35% from 2021.

Under the new rules, the lower treaty rate will be inapplicable unless detailed information on the final recipient of the dividend is submitted to the Finnish tax authorities. The new legislation will also increase the obligations and liabilities of foreign custodian banks and other intermediaries who may be liable for unpaid WHT, if detailed information on the dividend recipient has not been, or has been incorrectly, submitted.

From 2021, custodians registered in Finland will be required to confirm the jurisdiction of tax residence of the final recipient and to confirm that the provisions of a tax treaty are applicable. If the custodian fails to discharge this obligation, the custodian will be liable for any unpaid WHT. It is anticipated that banks and custodians will mitigate their own risk by withholding the maximum amount of WHT (35%) at source instead of applying the lower treaty rate and carrying a tax risk on behalf of their client. This would mean that recipients would have to go through a lengthy WHT reclaim process in order to benefit from the lower treaty rate.

The reform aims to improve tax authority supervision and the disclosure of final recipients’ identities. However, at the same time, it removes all the benefits of the ‘simplified procedure’ that aimed to increase the attractiveness of investing in Finnish shares. It remains to be seen how the change will impact foreign investment in Finland. There is a risk that investment into Finland will be seen as too expensive (due to 35% WHT rate) or too complicated (due to lengthy WHT reclaim process).

The new legislation is based on the OECD Treaty Relief and Compliance Enhancement (TRACE) model, but it seems that Finland will be the first country to implement changes on the basis of this model. There is a risk that Finland will be the guinea-pig for this experiment as it may take years to change established practices in the financial sector.