Limited companies and cooperatives are independent taxable entities whose income is taxed as income of the limited company or cooperative. The taxation on limited companies and cooperatives does not directly affect the taxation on their individual shareholders or members. The tax rate on limited companies and cooperatives is a fixed 20 per cent.
Limited companies and cooperatives can pay their employees salary which is taxed as salaried workers’ earned income. Limited company shareholders may receive dividend, and cooperative members may receive surplus payments. These payments have a separate taxation system: they include a capital income portion (30% tax) and a portion exempt from tax (0% tax). From an individual’s point of view, these tax-exempt portions are an attractive reason to become a shareholder in a limited company or a member of a cooperative if the company’s taxable profit is quite large. In companies making a smaller profit, these portions are economically less significant.
Taxation on shareholders’ dividends
The taxation on shareholders’ dividends is tied to whether the dividend is reaped from a company that is publicly listed on the stock exchange or an unlisted company.
Unlisted companies
In the tax system, dividend distributed to private people by unlisted companies are split into portions of capital income and earned income based on the company’s net worth. A company’s net worth is calculated by subtracting its liabilities from its assets.
Of dividend distributed by a company, 25 per cent is taxable capital income and 75 per cent tax-exempt income, insofar as the amount of the dividend is less than 8 per cent of the shareholder’s share of the company’s net worth.
If the total amount of dividend paid to a shareholder in a tax year exceeds 150,000 euros, of the excess portion 85 per cent is capital income and 15 per cent tax-exempt income. If the dividend is larger than 8 per cent of the shareholder’s share of the company’s net worth, of the exceeding part, 75 per cent is taxable earned income and 25 per cent tax-exempt income.
An example:
Person A owns 50% of a limited company whose assets are € 200,000 and liabilities € 80,000. Person A gets € 4,000 in dividend from the company.
The company’s net worth is € 200,000 – € 80,000 = € 120,000, and person A’s share of it is
50 % x € 120,000 = € 60,000. 8% x € 60,000 = € 4,800
Because person A’s dividend is less than 8% of their share of the company’s net worth, 25% x € 4,000 = € 1,000 of the dividend is taxable capital income.
Therefore, tax on the dividend is 30% x € 1,000 = € 300 (assuming the person’s capital income tax rate is 30%).
Listed companies
Of dividend distributed by publicly listed companies (companies listed on a stock exchange), 85 per cent is taxable capital income and 15 per cent is tax-exempt income when received by a private person.
Taxation on cooperative surplus
Unlike limited companies, the purpose of cooperatives is not to make profit for the owners but to engage in economic activity to support the members’ financial management and trade by allowing them to utilise the services provided by the cooperative.
The profit from cooperative activities is called surplus. Surplus can be distributed to the members only if this is stipulated in the rules of the cooperative. The distributed sum is determined based on the balance sheet of the latest audited accounts and the solvency of the cooperative.
The surplus tax treatment is affected by whether the cooperative is publicly listed (currently, there are none in Finland) or unlisted, and whether the cooperative has at least 500 members.
Of the surplus, 25 per cent is taxable capital income and 75 per cent is tax-exempt income up to an annual total of 5,000 euros. Of the portion exceeding 5,000 euros, 85 per cent is taxable capital income and 15 per cent tax-exempt income. In the taxation of cooperatives with fewer than 500 members, also profit from an equity is considered. If this annual profit exceeds 8 per cent, of the exceeding portion, 75 per cent is taxable earned income and 25 per cent tax-exempt income.
The links below contain the tax authority’s instructions on optimising taxation on limited companies and cooperatives. You can find more information on tax optimisation for limited companies from the Guidebook section “What company forms are there?” and the links in its subsection “Limited company”.