Note: “Road To Exit: Start-up’s First Year” is a practical blog series addressing the most common legal questions and problems that a start-up company and its management faces during their first year of operation. The series is sponsored by Attorneys at Law Borenius Ltd.
The Budget Bill for 2012 in Finland was presented to the Parliament by the Government on 5 October 2011. The Budget Bill proposes a number of changes in taxation and some of the changes and their impacts on start-up companies and their shareholders are discussed here. Although, the Parliament still needs to approve the Budget Bill, it seems that the changes proposed will apply as of 1 January 2012.
1. General outlines
In taxation the emphasis will be shifted from work and business towards consumption taxes. The taxation of earned income will not be increased and the corporate income tax rate will be decreased. At the same time, for example excise taxes (tobacco, alcohol, sweets) will be increased as well as capital gain taxation.
Main changes and their effects
- The corporate income tax rate is reduced from the current 26% to 25% (or even to 24.5%).
- The general capital income tax rate will rise from 28% to 30% and the tax rate will be 32% for capital income exceeding EUR 50,000 per year.
- The amount of tax-exempt dividends which an individual may receive from a non-listed company will be reduced from EUR 90,000 per year to EUR 60,000 per year.
- The difference between corporate income tax rate (25%) and capital income tax rate (30% or 32%) will increase and it can be even 7%. This will create an incentive to incorporate businesses which generate capital income (rental activity, venture capital). For example, an individual may practise personal investment activities through an own start-up company.
- The increase in the capital income tax rate encourages the allocation of investment activities to such investment targets in which annual profits can be reinvested without any tax expenses, thus resulting conceptually in compound interest effect. Such investment targets include e.g. investment funds reinvesting received dividends, endowment insurances and capitalization agreements. Furthermore, foreign investment companies in which no taxes are levied on the profit before it is distributed to shareholders may be a lucrative alternative in this context (see my previous post “Save Taxes Through A Foreign Company”).
2. Taxation of earned income
According to the fiscal policy of the Government there should be no increases in taxation concerning earned income. In Finland homeowners have traditionally benefited from the possibility of deducting the annual interest on mortgages for tax purposes. Now the Government has decided that this deduction will be limited gradually over the period from 2012 to 2014, by the end of which only 75 % of the interest will be deductible.
3. Taxation of capital income
The general capital income tax rate will be increased from the current 28% to 30% and made progressive so that the tax rate will be 32% for capital income in excess of EUR 50,000 per year.
A new fourth tax bracket will be introduced in inheritance and gift taxation concerning gifts and inheritances between near relatives. The proportion of inheritances and gifts exceeding EUR 200,000 will be taxed at a 16% rate instead of the current third bracket rate of 13%.
4. Corporate taxation
In the Budget Bill for 2012, the most important change in corporate taxation is the lowering of the corporate income tax rate to 25% from the current 26%. In addition to this, the government recently suggested a further decrease of 0.5% which would reduce the corporate income tax rate to 24.5% as of the start of next year. Moreover, the Government is committed to follow the development of corporate tax rates in other European countries and it is prepared to further reductions if this is needed to guarantee Finland’s competitiveness.
5. Taxation of dividends
The tax exempt amount of dividends paid by a non-listed company to a private person will be reduced to EUR 60,000 from the current EUR 90,000. The taxation of capital income will be increased, as mentioned above, through raising the tax rate and through introduction of two levels of tax rates. As the taxes paid by private persons on their capital income will increase next year, so will the taxes paid by shareholders in non-listed companies with strong balance sheets.
6. Measures to be considered before turn of the year
During the year 2011 it is still possible to benefit from the lower tax rates. When it comes to dividends paid by non-listed companies to private persons, the maximum tax exempt amount is this year EUR 90,000. If the company has not yet decided to distribute the maximum tax exempt amount, the company can prepare an interim financial statements which enables the distribution of additional dividends. In addition to this, it could be beneficial to distribute dividends even more than EUR 90,000, on condition that the dividend will be treated as capital income, in other words, it is not more than 9% on the share’s mathematical value (net assets). Of the amount of dividends that exceed EUR 90,000, 70% is taxed as capital income at the rate of 28%, and 30% is tax-exempt. The tax on dividend which is taxed as capital gain is this year 19.6%, whereas next year the tax will rise in maximum even to 22.4%. In case the company needs the funds in its own business, the shareholder can reinvest the distributed dividend as equity to the unrestricted equity fund (in Finnish SVOP-rahasto) of the company. This investment is included in the equity when calculating the mathematical value of the shares and the part of tax free dividend. The fund can be returned from unrestricted equity fund in future without tax consequences in case the acquisition cost of shares are higher than the returned amount.
If an individual expects to have sales which realize capital gain (e.g. exit of start-up company), generally it is more advantageous to sell such property in the course of this year from taxation’s point of view because the capital gain incurred during 2011 is taxed at the rate of 28% instead of even 32% in 2012.
If an individual is planning on giving taxable gifts or inheritances in the near future, these kinds of plans have more preferential tax treatment if they are carried out during this year due to the fact that a new fourth tax bracket will be introduced in inheritance and gift taxation as of 1 January 2012.
About the Author
Sami advises on domestic and international tax matters in corporate and personal income taxation. Sami has wide experience in acting as a daily administrative tax advisor and a tax coordinator of domestic and international group’s Finnish companies and branches. He is specialised in tax planning, mergers and acquisitions, corporate restructuring and changes of generation.
Attorneys at law Borenius Ltd is one of the leading law firms in Finland offering a full spectrum of commercial law services. Attorneys at law Borenius’ mission is to be the most hands-on, client-centred business solution provider. The firm’s approach to business challenges is team-oriented, combining its strong and diverse expertise with a thorough business understanding.
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