Government proposes reduction of the corporate income tax rate to 20 per cent
(A number of corrections were made to this text on 14 and 15 November)
The Government is proposing changes to the corporate income tax rate, to capital income tax progression, and to taxation of business activities, dividend income and the distribution of funds from non-restricted equity funds. The intention is to shift the focus of corporate taxation from the taxation of income remaining for a company’s use towards taxation of funds withdrawn from a company.
According to a bill given to Parliament today, 13 November, the corporate income tax rate would be reduced from the present 24.5 per cent to 20 per cent. According to an assessment prepared by the Government Institution for Economic Research, a reduction of the corporate income tax rate will mostly increase the output of capital-intensive sectors, which takes place particularly in the export industry. Growth of the capital stock will also increase demand for labour. The study indicates that employment would also improve by 5,000–7,000 jobs in the medium term.
The threshold for the application of the 32 per cent higher tax rate levied on capital income would be lowered from the present EUR 50,000 to EUR 40,000.
Of the dividend distributed by a listed company to a natural person, 85 per cent would be taxable capital income. Of the dividend of a non-listed company, 25 per cent would be taxable capital income in so far as the amount of dividend would correspond to an eight per cent annual return calculated on the mathematical value of the share, up to a maximum of EUR 150,000. Of the dividend exceeding the EUR 150,000 threshold, 85 per cent would be taxable capital income. In terms of the portion exceeding an amount corresponding to an annual return of eight per cent, 75 per cent of the dividend would be taxable earned income.
The taxation of dividends received by a corporation will be changed by tightening the so-called chain taxation rule. A dividend would in future be wholly taxable income if the corporation distributing the dividend is a listed company and the dividend recipient is a non-listed company that does not directly own at least 10 per cent of the equity of the company distributing the dividend when the dividend is distributed. The dividend would also be wholly taxable income when the dividend is received from elsewhere than a country of the European Economic Area.
Differing from the Government’s draft bill that was circulated for comment, the taxable part of a dividend received on the basis of the investment asset shares of financial, insurance or pension institutions would be 75 per cent, in accordance with the present regulation.
The distribution of funds referred to in the Companies Act from non-restricted equity funds would be considered a dividend in taxation. The distribution of funds of a non-listed company from the non-restricted equity fund would be considered, however, equal to an alienation of assets if the company were to return to a shareholder a capital investment he/she has made within ten years of making the investment. Compared with the Government’s draft bill that was circulated for comment, changes have been made with respect to the time limit set for the investment and the deductible acquisition cost.
Entertainment and representation expenses would be prescribed as completely non-deductible expenditure when calculating business income.
The tax deductible surplus of a cooperative would be limited both in relation to the cooperatives entitled to a deduction and the tax deductible amount. The Government proposal has in this respect been adjusted, taking into account the comments given on the draft bill. Differing from the draft bill that was circulated for comment, the Government does not propose in this context changes to the taxation of cooperative members, in respect of which preparations will continue and a separate proposal given on the subject.
The regulation relating to the limitation on the interest deduction right of corporations, unlimited partnerships and limited partnerships would be changed so that the maximum amount of deductible interest would be reduced from 30 per cent to 25 per cent and the losses and changes in value of financial assets would be removed from the items that are added in the calculation base of the percentage share.
It is proposed that the validity period of the Act on the increased depreciation of production-related investments in tax years 2013–2015 as well as the Act on the additional deduction of research and development activity be shortened to cover only 2013 and 2014.
Differing from the draft bill that was circulated for comment, the Government does not propose changes to the depreciation of long-term movable fixed assets.
The changes are intended to come into force from the beginning of 2014 and they would be applied as a rule to taxation that takes place for 2014. The regulation relating to the distribution of funds would be applied to the distribution of funds received from non-listed companies for the first time in 2016, if the capital investment has been made before 2014.
If tax revenue receipts do not develop as expected and the central government debt ratio does not level off by 2015, as part of adjustment measures the Government will make new tax decisions and will cut business subsidies as well as enhance measures to combat the shadow economy so that tax revenue grows. Possible reductions in business subsidies will be implemented and timed so that they do not adversely affect the investments and recovery of business activity. The overall package is expected to strengthen growth, employment and fairness in taxation.
Further information: Special Adviser Anu Rajamäki, tel. 358 2955 30398 and Special Adviser Ann-Mari Kemell, tel. 358 2955 30080.