A REPORT by Finnwatch, a Finnish corporate responsibility watchdog, has revealed that well known social media influencers have minimised their tax burden with a legal but questionable arrangement.
The arrangement takes advantage of a section in the tax code that states that dividends received from an unlisted company are subjected to a reduced tax rate if they amount to no more than eight per cent of the company’s net wealth and do not exceed 150,000 euros per shareholder.
Three-quarters of such dividends are exempt from taxes, while one quarter is subject to the capital gains tax.
Heikki Niskakangas, a professor emeritus of corporate law at Aalto University, stated to Helsingin Sanomat last Wednesday that the provision can create situations where a business owner is subject to a tax rate of 26 per cent on income that would be taxed at a rate of over 50 per cent in the case of a wage earner.
This encourages business owners to take out their income as dividends rather than wage.
The arrangement identified in the report by the corporate responsibility watchdog takes it one step further, however: the business owner sets up a holding company that acquires shares in their business in order to inflate the value of the business based on revenue potential – or “hopes and predictions,” as characterised by Niskakangas.
“They’re thereby creating the balance sheet from pretty much nothing,” he summed up to the newspaper. “It [goes against the spirit of the law].”
This enables business owners to mark up the value so that they are able to withdraw the maximum allowed 150,000 euros in dividends.
The arrangement was used by three companies, according to Finnwatch. WTD Media, which is owned by Natalia Salmela, SP Lifestyle, which is owned by Sara and Mikko Parikka, and Aurika Cleaning, which is owned by Auri Kananen.
Salmela has defended the arrangement on social media. “How many different kinds of tax tricks are used in the IT, logistics, construction, manufacturing sectors ran by all sorts of old men and uncles?” she asked on Instagram.
Niskakangas reminded Helsingin Sanomat that unlisted companies in such sectors rarely need to set up a holding company because they have the necessary wealth to take advantage of the provision to the maximum extent.
Kananen, meanwhile, said the corporate structure was created with the help of a professional to shield against possible legal action in the US. The tax benefits of the arrangement came as a “bit of a surprise,” she stated in an interview with YLE on 5 September.
“You can use the holding company to protect your money. If you’re sued, you won’t lose all your money but they’ll be safe there,” she said to the public broadcasting company.
“Of course I withdrew all the dividends I was able, that’s only smart.”
Industry lobbyists and policy makers have described the preferential tax treatment of dividends as an entrepreneurial incentive that consolidates the solvency of businesses and encourages business owners to accumulate wealth in the business before reaping the rewards of their work at a reduced tax rate, Juha-Pekka Raeste, a political and economic journalist at Helsingin Sanomat, recounted in an analysis on Monday.
The tax break affects mostly entrepreneurs who are wealthy, successful or who resort to various means to pump up the value of their business. The Ministry of Finance stated in its tax survey for this year that the benefits are enjoyed almost exclusively by entrepreneurs in the highest income decile.
In 2021, unlisted companies paid out 2.5 billion euros in dividends that were taxed at the reduced rate.
Aleksi Teivainen – HT