On December 28, 2007, representatives of the United States and Finland exchanged instruments ratifying and entering into force a new protocol (the "Protocol") amending the 1989 bilateral income tax treaty between the two countries (the "Treaty"). As discussed in more detail below, one of the major features of the Protocol is a zero-rate withholding tax on qualifying cross-border dividends. Because the Protocol entered into force before December 31, 2007, a unique effective date provision in the Protocol makes the zero-rate dividend withholding tax feature retroactive to January 1, 2007.
Before its amendment by the Protocol, the Treaty provided for a maximum withholding tax rate of 15 percent on cross-border dividends generally and a 5 percent maximum rate for dividends where the beneficial owner of the dividends owned at least 10 percent of the company paying the dividends. The Protocol retains the Treaty's dividend rate structure, but adds an additional zero-rate withholding tax category. Generally, the zero-rate applies to a dividend where the beneficial owner of the dividend has held 80 percent or more of the voting power of the company paying the dividend for the 12-month period ending on the date of entitlement to the dividend. In addition, the zero-rate generally applies to dividends beneficially owned by a pension fund residing in the other country. Under the Protocol, special rules apply to dividends paid by regulated investment companies and real estate investment trusts.
In addition to zero-rate dividend withholding, the Protocol, originally signed by country representatives in Helsinki on May 31, 2006, eliminates withholding tax on cross-border royalty payments. The Protocol also contains some additional features, including but not limited to: (i) a more restrictive Limitations on Benefits article generally intended to prevent treaty shopping and (ii) an expanded saving clause generally permitting a country to continue to tax its citizens and long term residents who are residents of the other country as if the Treaty were not in force. Generally, the latter provision potentially could affect a Finnish citizen who is a long term (at least 8 years) resident of the United States if such a person surrenders his or her green card. However, the provision would not affect a Finnish citizen who resides in the U.S. as a diplomat or under some other non-immigrant status.
In contrast to the retroactive effective date for the zero-rate dividend withholding feature, typical effective dates apply to the Protocol's other provisions. The effective date of the Protocol for provisions impacting withholding tax obligations (other than the zero-rate dividend withholding tax feature) is February 1, 2008. The effective date of the Protocol for all other purposes is January 1, 2008.
Any tax advice contained in this communication was not intended or written to be used, and it cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed on a taxpayer under any tax law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
