Many professionals would prefer to pay taxes on capital income because the tax burden is lighter than on earned income.
However following a years-old public debate that focused scrutiny on the practices of a medical firm, new regulations stipulate that dividends distributed to individuals working for a limited liability company are to be considered earned income.
Now, in a recent decision outlined in its annual yearbook, Finland’s Supreme Administrative Court has expanded its interpretation of the regulation to declare that even capital income from a limited partnership company paid to the limited liability company acting of a partner is still to be considered that individual’s earned income for work performed.
Broader interpretation of dividends for work done
According to the Finnish Tax Administration Vero, the court’s decision sends a clear message that the scope of the provision covering dividends paid for work performed is broad.
“The ruling reinforces the tax administration’s established taxation practice guidelines so in practice it will not result in any changes to implementation of the provision. The decision clearly indicates that the scope of the provision for work-based dividends is extensive,” said Tero Määttä, Vero’s lead tax specialist.
Furore over minister’s earnings-as-dividends
Back in 2014, then- Health and Social Affairs Minister Laura Räty came under scrutiny for adopting arrangements to declare taxable additional income as tax-free dividends. The practice reportedly continued for a period of four years while she worked as a physician.
Yle reported that between 2007 and 2011, Räty pocketed roughly 20,000 euros in additional income, declared as dividends from a firm known as DocOne in which a company she owned was a shareholder. Had Räty declared this income as a salary in addition to earnings from the Helsinki-Uusimaa hospital district HUS, she would have had to hand over more than half of it in taxes and other statutory contributions.
The practice was not illegal at the time, and Räty later said she would not do the same thing again.
Lost tax income minimal
The Supreme Administrative Court based its ruling on the review of a separate case in which a doctor worked at a limited partnership firm and was paid via a limited liability company. The court also found that the business model used by the medical practice’s limited partnership company was artificial and unsubstantial. It found that the only benefit for shareholders would have been anticipated taxation gains.
Vero’s Määttä told Yle that it was not possible to estimate how much tax authorities lost as a result of this kind of business activity.
“There are no statistics about this available, but since there hasn’t been much of this kind of activity, we are not talking about large sums,” he noted.
The bench voted 3 – 2 to adopt the position. Legal advisors who cast the dissenting votes deemed that the relevant section of legislation dealing with work-related dividends is governed by a special regulation that cannot be expanded to cover limited partnership firms.
The tax administration spokesman said that he had no precise information about the number of similar cases that the authority is prosecuting in the courts, but speculated that they were not many.
“We generally encounter these kinds of arrangements when we conduct taxation reviews of different specialist firms, so they may arise in the future,” Määttä commented.