FINLAND - The European Commission has referred Finland to the European Court of Justice for failing to address legislation that discriminates against foreign pension funds.

Under current legislation, dividends paid to non-resident pension funds by foreign companies based in Finland for tax purposes are subject to a withholding tax on gross income at a rate of 19.5%.

Finnish pension funds, meanwhile, are taxed under a separate regime where there is no withholding tax but 75% of the dividend income is subject to corporation tax. The nominal corporate tax rate is 26%, meaning the tax rate for dividends paid to Finnish pension funds should also be 19.5%.

But the European Commission argues that tax is calculated on the net income of the pension fund - after deduction of costs and pension liabilities - meaining in practice "the effective tax rate on dividend income paid to a Finnish pension fund is lower than 19.5%".

The Commission has previously issued a reasoned opinion to Finland in June 2009 on the issue, asking them to amend the tax provision. But by failing to comply with the formal request the country has now been referred to the ECJ for further action, because it considers the rules to be "incompatible with the free movement of capital". (See earlier IPE article: EC takes action against Italy, Denmark and Finland)

This is not the first time the Commission has taken action on the issue: it has already referred cases to the ECJ concerning similar tax provisions in Portugal and Spain, and sent reasoned opinions to Denmark and Germany. (See earlier IPE articles: Tax reclaim on dividends for exempt investors in Spain; EC seeks changes to Belgian and French tax rules and EC pursues Germany on pension dividends)

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