Tax Rates Rising

The corporate tax rate in Finland will be increased from 25 % to 28 % from January 1, 1996. Also the tax rate for capital income (interest income, dividend income, rental income etc.) will be increased from 25 % to 28 %. For foreign investors it is worth notifying that withholding taxes on dividends and royalties will also be increased to 28 % if not lowered in tax treaties or abolished between EU countries (dividends). Progressive tax rates for earned income, for example salaries, will not be changed drastically. The government promises that no further increases will occur during this parliamentary term.

Merger Loss Abolition

Abolition of tax deductible merger loss is very likely to be in force January 1, 1996. A government bill concerning that issue was given November 3,1995. After the change merger of companies will be treated neutrally in taxation. Merger loss is not tax deductible and merger gains are not taxable income. Together with other changes implementing the EU merger directive the tax consequences of acquisitions and reorganizations in Finland will be changed drastically. Mergers that have been started before November 3,1995 will still benefit from the existing favorable tax deduction rule.

Special Relief for Incoming Expatriates

The government bill has a proposal of a special 35 % tax rate for expatriates. This regime is directed for foreign directors working in companies in Finland and also living in Finland. Their income is proposed to be taxed at a final flat rate tax of 35 %. However it seems unlikely that this bill will pass the Parliament because a same kind of bill was not approved some times ago. Companies planning to assign expatriates to Finland should seek for further advise.

Losses and Carry Forwards

According to law in force an ownership change of more than 50 % of shares in a company abolishes the company's right to carry forward its tax losses. According to government bill availability of carry forwards of losses will be restricted if more than 50 % of shares in a holding company owning at least 20 % Finnish company change hands (indirect change of ownership). If such an indirect change of ownership takes place the shares of the Finnish company owned by the holding company are also deemed to change ownership. These provisions will also affect tax carry forwards under the imputation system.

Tax Returns

According to government bill companies that have an accounting period that ends January 1, 1996 or later, should file their tax return in four months from the end of their accounting period. If a company has accounting period that ends for example January 31, 1996, the company should file its tax return at the latest at the end of May, 1996. According to provisions today the company should file its return by January 31, 1997. If a company has not paid enough taxes beforehand by the day of the filing of the company's tax return, there will be set a non tax-deductible interest of 8 % to the amount not paid from the filing day until the day of final assessment of the taxes is made by tax authorities.

VAT News

There is a government bill proposing several changes to the VAT Act in Finland. There will be changes required by the second simplification Directive (95/7/EC) with regard to supplies under a contract to make up work, work on movable goods, travellers' allowances and tax base upon import. The most important changes are however the changes in margin scheme for second hand goods and a VAT warehouse regime.

For further information please contact the appropriate tax lawyer at Tilintarkastajien Oy - Ernst & Young, Kaivokatu 8, 00100 Helsinki, Finland: TAX RATES RISING AND MERGER LOSS ABOLITION - Kirsi Hiltunen, +3558 0 1727 7200. SPECIAL RELIEF FOR INCOMING EXPATRIATES - Tuula Helaniemi +3558 0 1727 7406. LOSSES AND CARRY FORWARDS + TAX RETURNS Jukka Nisonen, +358-0-1727 7282. For VAT NEWS telephone Paivi Taipalus on +31 20 549 7657 (Amsterdam), or enter a text search 'Ernst and Young' and 'Business Monitor'.

The content of this material is intended to provide general information on the subject matter. It is therefore not a substitute for specialist advice.