Helsinki Administrative Court Ruling Clarifies Obligations of Dividend Payors in Cross-Border Situations

A recent ruling from the Helsinki Administrative Court pertains to the obligations of dividend payors and the withholding tax treatment of dividends paid to a foreign financial institution. The foreign dividend recipient involved in the case had acquired shares in Finnish listed companies based on share lending and owned the shares for a brief period of time around the ex-date. The Finnish Tax Administration argued that no tax treaty benefits should have been granted, resulting in unpaid withholding taxes being imposed on the Finnish listed companies who had paid the dividends.

In its decision handed down in February 2024, the Administrative Court ruled that the Finnish listed companies acted in accordance with the applicable law and that no unpaid withholding taxes should be imposed on them. This ruling is significant as it sets boundaries on the extent of the investigation obligations required from Finnish dividend payers in cross-border situations. The ruling also touches upon the concept of beneficial ownership in share lending situations.

Borenius acted as legal counsel to the majority of the Finnish issuers in the proceedings.

The Administrative Court's ruling involved a situation where several Finnish listed companies (the “issuers”) paid dividends to a foreign financial institution (the “dividend recipient”) between 2014 and 2016. The Finnish issuers had applied a tax treaty based dividend withholding tax rate (0%) to the dividend payments.

The Finnish Tax Administration (the “FTA”) initiated tax audits against the Finnish issuers and claimed that the dividend recipient was not the beneficial owner of the shares because it had acquired the shares based on share lending and owned the shares only for a short period of time around the ex-date.

Further, the FTA argued that the Finnish issuers had not fulfilled their investigation duties arising from the Finnish Withholding Tax Act (the “WTA”) and had therefore neglected their responsibilities related to dividend payment in a way that merited unpaid withholding taxes being imposed on them.

The legal questions that were raised at the Administrative Court can be summarised as follows:

In February 2024, the Administrative Court ruled that the Finnish issuers had acted in accordance with the applicable law with no negligence and that no withholding taxes should be imposed on them. The Administrative Court also ordered the FTA to compensate some of the legal costs the Finnish issuers had accrued.

The decision of the Administrative Court is not legally valid yet.

The Administrative Court’s decision is significant as it clarifies the interpretation of Section 10 of the WTA and the extent of the investigation obligations required from dividend payers.

The decision sets clear boundaries for the investigation obligations of Finnish issuers that pay cross-border dividends. The Administrative Court stated that when the dividend recipient provides either a tax-at-source card or both identifying information and its address, it has fulfilled the requirements for the application of the tax treaty as stated in Section 10 of the WTA.

This ruling also made clear that Section 10 of the WTA does not impose wide-reaching requirements on dividend payers to separately investigate the beneficial ownership status of the dividend recipients or separately investigate the correctness of the information provided by a dividend recipient before each dividend payment, unless it is clearly obvious that the information is untrue.

The Administrative Court also confirmed that it is sufficient for the dividend recipient to present the information required in Section 10 of the WTA before a dividend payment is made. Contrary to the FTA’s arguments, it is not mandatory to request this information separately before, or within close proximity to, each dividend payment.

The Administrative Court’s ruling is well-founded, and it considers the realities involved in dividend payment processes. Unlike the FTA had claimed, it would not be realistic to require for each dividend recipient to be separately investigated just before a dividend payment is made under threat that all treaty benefits will be denied otherwise. Such a requirement would completely halt the possibility to grant tax treaty benefits in circumstances where tens of thousands of dividend instalments are settled in just a few days.

The Administrative Court’s decision is also interesting in the sense that it is the first Finnish court case to touch upon the concept of beneficial ownership. The FTA had claimed that the foreign dividend recipient was not the beneficial owner of the Finnish shares because it had lent the shares and owned them only for a short period of time.

In this case, the dividend recipient had signed share lending agreements with unrelated parties based on widely used standard agreements. Pursuant to these agreements, full ownership of the shares had transferred to the dividend recipient and the dividend recipient, as the borrower, was obliged to pay manufactured dividends to the lender if any dividends were to be paid to the shares subject to the share lending arrangement. It is also worth noting that the dividend recipient’s counterparties were international banks that would have also been entitled to a tax treaty based withholding tax rate of 0% on dividends received from Finland.

Unfortunately, the Administrative Court was not required to consider the concept of beneficial ownership in more detail as it reached its decision directly based on the interpretation of Section 10 of the WTA.

It therefore remains unclear as to whether share lending arrangements can affect the dividend recipient’s status as a beneficial owner. Although it has been widely considered in legal literature for the borrower that receives full ownership of lent shares to be the beneficial owner – and taking into consideration that the OECD Commentary on Model Tax Treaty also excludes normal financial transactions from considerations related to beneficial ownership – the FTA seems to consider otherwise. Finnish case law clarifying this topic is therefore highly anticipated.

Section 10 of the WTA has become less relevant in recent years after new legislation related to the TRACE model (Treaty Relief and Compliance Enhancement) was introduced in 2021. The new Finnish rules based on the TRACE model have shifted both the investigation obligations and liability for unpaid taxes from issuers to authorised intermediaries (mostly banks or other financial institutions).

However, one could ask whether this recent case law from the Helsinki Administrative Court should be interpreted to mean that the investigation obligations of authorised intermediaries should have some limits as well. It seems that at least unreasonable obligations to re-confirm or challenge the correctness of information already provided by the dividend recipient prior to each dividend payment should not be possible.