Dividends and withholding tax

Dividend taxation in more detail

Dividends are taxed as capital income, but there are special features. 85% of a dividend from a listed company is taxable (15% is tax-free), so the effective tax rate ends up slightly lower than the capital income tax rate. A dividend is taxed when it is paid, so someone who owns shares directly pays tax every year even without selling anything. An accumulating ETF gets around this: it reinvests the dividends inside the fund without realizing them as taxable income, which defers the tax until you sell and improves the effect of compounding.

The accumulating ETF and tax deferral

For an investor with a book-entry account, the accumulating ETF is the most important tax tool. Because it automatically reinvests dividends inside the fund, dividends are not realized as taxable income along the way. Tax only falls due when you sell the units at a profit. This gives a tax deferral benefit similar to the equity savings account's, without the equity savings account's restrictions (a €100,000 cap, shares only). For a long-term index investor, an accumulating world index ETF on a book-entry account is often the most tax-efficient and simplest combination.

Foreign dividends and withholding tax

Dividends from foreign shares and ETFs are subject to withholding tax, which the source country collects as soon as the dividend is paid. Tax treaties and, in the case of an ETF, the fund's domicile affect how large it is: for a European investor, a UCITS ETF registered in Ireland is often favorable, because Ireland's tax treaty reduces the withholding tax on US dividends. Dividends from foreign shares you hold directly are also taxed in Finland, and double taxation is relieved by crediting the withholding tax. Withholding tax collected inside an ETF, however, can't be credited in your own taxation. The choice of domicile and share class affects your net return quietly but permanently.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.