What are net assets and how do they affect income taxation in Finland?
Net assets for different types of companies
To put it briefly, the term 'net assets' means the amount of euros obtained by deducting the company's liabilities from its assets. This becomes more complicated for different types of companies when only certain items are included in the assets.
'Net assets' is a tax term and differs in certain details from accounting concepts. It is generally understood as a simple operation where the liabilities of a company are deducted from its assets. However, the principles for the calculation differ for limited companies, proprietorships, and partnerships.
Determining the net assets is important in the first place because it is the basis for the distribution of dividends in a limited company, and the basis for determining the share of capital income in a partnership.
It is important to remember that the net assets always relate to the previous year. Even if the financial year ends at any point in the year, there must always be New Year's Eve fireworks in between the distribution of income. For example, business income for 2022 will be distributed based on net assets for 2021.
Net assets include only assets that are part of the business activity, that is fixed, current, investment, and financial assets. In practice, these include buildings, real estate, equipment, machinery, vehicles, goods, money, and trade receivables.
Net assets of a limited company
The taxation of dividends received from an unlisted company by a shareholder of a limited company depends on whether the company distributes more or less than 8% of the mathematical value of the share as dividends. If the company distributes up to 8% as a dividend, 25% of the dividend is taxable capital income and 75% is exempt income.
The mathematical value of a share is calculated by dividing the net assets by the number of outstanding shares. The calculation of the mathematical value is based on the revised net assets calculated according to the previous year's financial statements, which can be found in the company's annual tax decision. If the dividend distribution is made based on the unrevised net assets, the tax-exempt dividend may become an earned dividend. In this case, 25% of the dividend is exempt capital income and 75% is taxable capital income.
The mathematical value of the shares held by the shareholder may be reduced by the value of the residence occupied by the shareholder. The shareholder's loan, which is money borrowed from the company by the shareholder, is also deducted.
This article discusses the taxation of dividends exclusively. However, in many cases, the income withdrawn by a shareholder from the limited company is partly salary and dividend income. For a definition of the relationship between these items of income, we recommend also reading the article: When should a shareholder take salary payment and when should they take payment in dividends?
Net assets of a partnership and a proprietorship
The amount of the business's net assets is used to divide the business income of the proprietorship into earned income and capital income. Capital income is the annual return of 20% of the previous year's net assets. If the earned income is exceptionally low, the entrepreneur can claim only 10% or 0% of the net assets as capital income. The claim must be made on the tax form before the end of the tax year.
The income of limited partnerships and general partnerships is also allocated to the partners for taxation as earned income and capital income based on the net assets of the partnership. From the partners' share of income, the amount of capital income is first calculated, being usually 20% of the partners' net assets at the end of the preceding tax year.
The net assets of partnerships and proprietorships include all assets used in the business. Assets not part of the business income are excluded from the net assets. The exception for a proprietorship is a bank account, which is not included in the business assets.
In addition, 30% of the wages and salaries paid in the 12 months preceding the end of the tax year is added to the net business assets of a partnership, a general partnership, or a limited partnership. Even if the accounting period is longer, only the last 12 months of wages are considered.