In January 2020 private investors in Finland will gain access to an equity savings account, to which they will be able to deposit up to 50 000 euros for investing in shares. The aim of the legislation reform is to make investment more attractive to ordinary citizens.

A person can from the beginning of next year deposit a maximum amount of 50 000 euros to an equity savings account, through which they can buy shares of domestic or foreign companies listed on a stock exchange or Nasdaq First North. The person will be able to choose what they want to invest in and the amount of the investment. The shares that are stored in the account are property of the account holder and thus under the account holder’s name. The shareholders’ rights and the right to vote in the shareholders’ meeting belong to the account holder.

How does the new investing tool work?

It will be possible for the account holder to re-invest dividends paid to the account without incurring any taxes and thus in the long run benefit from the compound interest effect. In addition, the account holder will have an opportunity to sell shares without any direct tax effects, when the selling is done within the account. When selling of shares is done outside of an equity savings account, the selling launches taxation. Consequently, the shares can be sold without any taxes being paid at the point of selling, as long as the money is not withdrawn from the account. However, the investor should take into consideration that when withdrawing money from the account, the dividends are subject to capital income tax altogether, when otherwise only 85 percent of dividends are subject to taxation. At the time of withdrawal, the account holder has to pay tax an amount equal to capital income tax, which today is 30 or 34 percent. Taxation of an equity savings account is similar to taxation of an investment fund.

The account holder will be able to deduct losses on investment only when the account has been closed, all the assets have been sold and the profits withdrawn. Furthermore, it is important to take into consideration that the presumed acquisition cost is not in use when investing through equity savings accounts. When a person who invests in funds or owns shares directly sells investments from over ten years ago, they can use the 40 percent presumed acquisition cost, whereas regarding an equity savings account there is no such possibility.

A means to encourage new people to invest

The legislation reform has received both opinions for and against it. The Finnish government has marketed the proposal as a means to make investment a more attractive proposition for ordinary citizens. The taxation is simpler because it is done only when money is withdrawn from the account. Small savings can grow into big amounts if the investment is done to a profitable object and the dividends are re-invested. However, the reform has also faced a lot of criticism. A subject of concern is that when taxation is postponed, the account holder cannot be sure about the tax rates at the moment of withdrawal. There is no certainty about future legislation and in the worst case the account holder is obligated to pay taxes to such amount that the profitability of the investment is non-existent. Additionally, the facts that the dividends are taxable at full amount and that the presumed acquisition cost is not at effect have received criticism regarding the question, if an equity savings account is truly a more attractive way to invest, compared to the already existing methods.

Related news (Helsinki Times): Parliament approves proposal for new equity saving accounts

Additional information:

Olli Kiuru, partner, [email protected],  tel. +358 40 716 8020