Designing Net Asset-Based Income-Splitting Rules under Dual Income Tax

Kari S. () and Olli Ropponen
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Kari S.: VATT Institute for Economic Research, PO Box 1279, 00101 Helsinki, Finland

Nordic Tax Journal, 2024, vol. 2024, issue s1, 25-43

Abstract: This article revisits the income-splitting regulations within the Nordic dual income tax framework. These regulations were introduced to counteract the inclination to transfer income between labor and capital income tax bases. They involve imputing a return on equity, considered as capital income, and taxing the residual portion at rates similar to those imposed on labor income. There are primarily two methods for computing imputed capital income. One method involves imputing a return based on the shares’ acquisition price (implemented in Sweden and Norway), while the other calculates a return using the net book assets of the company (utilized in Finland). This study examines the economic implications of the net asset-based splitting approach, an area not extensively explored in earlier literature. Our findings suggest that with appropriate selection of tax-parameter values, the net asset-based splitting system embodies the fundamental characteristics of a neutral corporate tax system akin to the ACE corporation tax. Consequently, our analysis indicates that the issues regarding incentive concerns in the Finnish taxation of closely held companies, highlighted in previous studies, stem more from erroneous parameter values rather than flawed underlying principles.

Keywords: Dual Income Tax; Income-splitting; Neutral Taxation; Investment; Depreciation Allowances (search for similar items in EconPapers)
JEL-codes: H21 H24 H25 H32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:notajo:v:2024:y:2024:i:s1:p:25-43:n:1003

DOI: 10.2478/ntaxj-2024-0005

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