Achieving tax efficiency: strategies for individual investors living on investment capital income in Finland

Abstract

This thesis examines tax-efficient strategies for distributing investment income in Finland, with a focus on approaches that optimize tax outcomes for individual investors relying on investment capital income. The research explores strategies that allow investors to minimize their tax burden by utilizing different legal forms, applicable to both individual taxpayers and corporate entities, to manage capital income from sources such as capital gains, dividends, and interest. The study is grounded in Finland’s complex tax regulations, which significantly impact how investment income - whether in the form of capital gains, dividends, or salaries - is taxed. The objective was to identify income distribution methods that reduce tax burdens while remaining compliant with Finnish tax laws. The scope includes individual investors acting in a personal capacity, as well as those utilizing corporate structures, particularly unlisted companies, to distribute corporate profits either as salaries, dividends or both. The research employed a qualitative methodology, using primary and secondary data sources. Primary data was collected through scenario modelling to simulate various tax burden outcomes, while secondary data included official guidance from the Finnish Tax Administration, legal interpretations from the Finlex database, various professional publications and Finnish expert literature. The data collection covered recent tax years, enabling a relevant analysis of current tax laws and regulations. The modelling approach facilitated a detailed comparison of the tax effects of different income distribution methods, encompassing capital income for individuals and corporate profit distributions in the form of either salaries or dividends. The findings reveal that the distribution method chosen has a significant impact on the overall tax liability and net income of both individual investors and corporate entities. For individual investors, classifying income as capital gains can yield favourable tax rates under certain conditions. For shareholders in unlisted companies, a balanced approach between dividend and salary distributions optimizes tax efficiency while also maintaining social security and pension guarantees. The conclusions offer a practical framework for individual Finnish investors to make informed decisions on income distribution, aligning tax strategies with optimal financial outcomes. This study enhances the understanding of tax planning in Finland, providing actionable insights into structuring investment income distribution to reduce tax liabilities.