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DOING BUSINESS IN FINLAND

TYPES OF BUSINESS ORGANISATION

Principal forms of doing business

A firm may choose one of five forms of business organisation in Finland: limited partnership, general partnership, limited company, co-operative or branch. Foreign-owned firms almost always choose the limited-company (corporation) form, which requires entry in the Trade Registry—a process that takes about a month to complete. A limited company may be established by one or more persons or organisations resident in countries of the European Economic Area (EEA). The requirements are as follows:

Capital. Minimum share capital of €8,000 (100% paid up) is required for a new private limited company and €80,000 for a public limited company. The minimum number of shares is one. There is no legal reserve requirement. Capital may be supplied in non-cash forms, which must be “reasonable” and valued by auditors approved by the Central Chamber of Commerce (KHT) or the Chamber of Commerce (HTM).

Founders, shareholders. A minimum of one founder or shareholder is needed, who may be an individual or organisation resident in a country within the EEA. Where there is more than one founder, at least half of the founders must be residents of an EEA country. Under permission granted by the National Board of Patents and Registration (NBPR), residents from outside the EEA or organisations domiciled outside an EEA country may also act as founders of corporations. A non-EEA resident subscriber does not need permission if the founder is an individual or organisation residing in an EEA country. A Finnish company or foundation may also be a founder. Therefore a Finnish limited company whose shareholders are all non-EEA residents may act as founder of another company. A copy of the company’s certificate of incorporation and draft articles of incorporation must be delivered to the Trade Registry at the National Board of Patents and Registration within six months of the date on the company’s memorandum of association signed by the founders; otherwise, its formation is deemed to have lapsed. At the same time, a company must deliver a copy of written and dated approvals from the members of the board of directors, deputy members of the board of directors, managing director and auditors for their designations.

Board of directors. If share capital is at least €80,000, the board must have at least three members. If share capital is less than €80,000, the board must have at least one or two members and one deputy member. Articles of association may stipulate either a fixed number of members or a minimum and maximum number. In a company whose share capital is at least €80,000, the articles may stipulate that the company can have a supervisory board. At least half of the supervisory board members must be residents in an EEA country. The National Board of Patents and Registration can grant an exemption from these requirements. The managing director or a member of the board may not act as a member of the supervisory board. The supervisory board oversees management of the company by the board of directors and the managing director. At least half the members of the board and the managing director must be residents of EEA countries. The Ministry of Trade and Industry (MTI) can grant an exemption from these requirements.

Management. A limited company may have a managing director appointed by the board of directors. The managing director is in charge of the current affairs of the company under instructions issued by the board of directors. The managing director may also be a member of the board of directors. A limited company whose share capital is at least €80,000 must have a managing director. The managing director must be a resident of an EEA country. Exemptions may be granted. There are no requirements that labour must be represented on the board or in management. However, labour representatives may be elected as members of the supervisory board.

Disclosure. Limited companies must deposit the balance sheet, profit-and-loss statement, annual report, account of sources and applications of funds, and auditor’s report on the statutory financial statements with the Trade Registry no later than two months after the confirmation of the balance sheet and profit-and-loss statement. Public limited companies must also prepare an interim report and publish it within three months from the end of the reporting period. One or more auditors, depending on the size of the company, must be appointed at the annual shareholders’ meeting. Non-EEA residents may be appointed, but at least one auditor must be a resident of an EEA country. Public limited companies must always appoint at least one auditor authorised by the Central Chamber of Commerce (KHT).

For private limited companies, at least one of the auditors must be approved by the Central Chamber of Commerce (KHT) or the Chamber of Commerce (HTM) if two of the three following conditions are met during the fiscal year: annual turnover is more than €680,000, total assets are more than €340,000 and the company employs more than ten employees on average. Only an authorised auditor (KHT or HTM) may be appointed if two of the three following conditions are met during the fiscal year: annual turnover exceeds €4,200,000, total assets exceed €2,100,000 and the company employs more than 50 employees on average. At least one KHT-authorised auditor must be appointed if the company has emitted publicly traded securities and if two of the three following conditions are met during the fiscal year: annual turnover exceeds €50,000,000, total assets exceed €25,000,000 and the company employs at least 300 employees on average.

Taxes and fees. Trade Register notices must be filed in writing, in two copies, on the forms prescribed by the National Board of Patents and Registration (NBPR). A copy of a bank transfer verifying that the amount stipulated for the notice has been paid must be attached to the copies. The payments can also be made to the cashier of the NBPR’s Trade Register Department. Setting up a corporation is inexpensive in Finland. The incorporation duty for approval of the company’s articles by the Patent and Register Office and for listing in the Trade Register is €330. Amendment of the articles of association costs €330. Amendment notices such as changes in the board of directors and managing director cost €57. The NBPR’s decision granting exemption from EEA residency requirements for the managing director and the members of the board costs €100.

Types of shares. Shares must be registered, but the shares of publicly listed companies may in fact be transferred “in blank”, making them the equivalent of bearer shares in other countries. Both common and preferred shares are permitted.

Control. A simple majority of shares ensures control, although 10% of shareholders may demand a special auditor or initiate malfeasance proceedings. Helsinki Stock Exchange regulations forbid any shareholder from controlling more than 80% of a listed company’s shares.

Establishing a branch

Although foreign companies may operate in Finland through a branch, this does not offer any special advantages. In fact, branches are subject to the net-wealth tax (except when exempted under EC law or treaty non-discrimination clause), whereas resident firms are usually exempt.

A branch needs to conduct its accounting and bookkeeping in the same manner as a Finnish corporation, except that its financial statements need not be audited if the overall books of the foreign company are being prepared, audited and disclosed to the public according to EU provisions (or in a similar manner). If the foreign company’s financial statements have not been prepared, audited and disclosed in such a way, the books of the branch must be prepared, audited and made public (filed with the Trade Registry) under the Finnish rules.

A branch of an organisation resident in the European Economic Area (EEA) must register with the Trade Registry (a subdivision of the National Board of Patents and Registration). Organisations from outside the EEA must also obtain a licence from the Ministry of Trade and Industry.

Setting up a company

A firm may choose one of five forms of business organisation in Finland: limited partnership, general partnership, limited company, co-operative or branch. Foreign-owned firms almost always choose the limited-company (corporation) form, which requires entry in the Trade Registry—a process that takes about a month to complete. One or more persons or organisations resident in countries of the European Economic Area (EEA) may establish a limited company. Non-EEA residents may form a limited company with permission from the Ministry of Trade and Industry. Since a foreigner does not need permission from the ministry to act as a subscriber to shares, a popular practice is to form a joint company where a resident from an EEA country is the founder and subscriber to shares (subscription of shares is not obligatory for the founder) and residents in countries outside the EEA act only as subscribers.

The Trade Registry maintained by the National Board of Patents and Registration must be notified within six months from the signing of a memorandum of association of the company by making a so-called statutory notice. The registration notice must be made in two copies on a Finnish- or Swedish-language form confirmed by the National Board of Patents and Registration. After registration, the company may acquire rights and undertake obligations. If the registration notice is not filed within six months, the company’s registration is automatically cancelled.

Finnish auditing legislation is harmonised with the EU’s Directive on the Approval of Persons Responsible for Carrying Out the Statutory Audits of Accounting Documents. The essential legislation comprised the Auditing Act and the Auditing Ordinance, which define the use of authorised public accountants (KHTs) and approved accountants (HTMs). Only small companies are entitled to use accountants other than KHTs and HTMs to audit their accounts.

Finnish company legislation is in line with EU directives. The last major amendments to the Companies Act in September 1997 included dividing limited companies into public and private forms. Since Finland joined the European economic and monetary union (EMU) at the beginning of 1999, minimum share-capital requirements have changed slightly. The minimum share capital of a public company is now €80,000 and that of a private company, €8,000. Existing companies have until the end of August 2004 to raise their share capital to the new minimum levels and to amend their articles of association to comply with the legislation. Currently there is a bill in parliament extending the above-mentioned due date (end of August 2004) to the end of calendar year 2005. This amendment has not yet been approved.

A company’s share capital may be denominated in Finnish markkas only if its memorandum of association was signed prior to January 1st 2002. The minimum share capital recorded in euros must be converted into Finnish markkas at the fixed conversion rate issued by the Council of the EU. Under the official conversion rate, the minimum capital of €8,000 of a private company is FM47,565.84 and the minimum capital of €80,000 of a public company is FM475,658.40. The entire subscribed share capital of the company must be paid up before the company may be registered. The abbreviation of the designation of a public company is “oyj” (“abp” in Swedish).

Public companies have a stricter disclosure duty than private companies to ensure that investors are adequately informed of business developments. A public company must publish half-yearly reports in addition to submitting final accounts on an annual basis to the registering authority. A public company must have at least one auditor (KHT) certified by the Central Chamber of Commerce.

BUSINESS TAXATION

Overview

Finland’s corporate tax regime remains favourable by west European standards. In this regard, Finland is similar to neighbours Sweden and Norway: all three have higher-than-average personal taxation levels but also have some of the lowest corporate tax rates in the OECD. Since January 1st 2000 Finnish corporate tax has been set at a uniform rate of 29%, which applies to all types of corporate income, including profits, interest income, dividends, royalties and rental income. No one form of business organisation has a distinct tax advantage, since it also applies evenly to all companies, including subsidiaries and branches of foreign concerns. Value-added tax (VAT) is charged on imports (but not exports).

Like the other 11 members of the European single currency, Finland is trying to maintain balanced public finances while harmonising its tax laws with those of the European Union. The Finnish government continues to increase energy and environmental taxes, to unify taxes on international capital transfers and to reduce VAT for labour-intensive services. To spur industrial investment, the government extended the availability of accelerated depreciation rates to small and medium-sized companies in regional-development areas.

An amendment to the Act on Tax Withheld at Source from Interest, effective June 2000, makes the previously tax-exempt interest income received by resident individuals on bank deposits taxable at source, at a 29% rate. Bank deposits continue to be tax exempt, however, for calculating net wealth. It is estimated that taxing bank deposits would increase the state’s tax revenues by FM400m–500m annually (corresponding €67.3m–84.1m).

Corporations in Finland have been subject to a 29% uniform corporate income tax rate since January 1st 2000. The same rate applies to subsidiaries and branches of foreign companies. The minimum level for distributed dividends is 29% under the imputation credit system. Profit remittances from a Finnish branch to a foreign parent are not subject to withholding tax. There are no excess profits or alternative minimum taxes in Finland.

Partnerships are regarded as transparent for Finnish tax purposes. Income from partnerships is split into investment income and earned income in the hands of individual (resident or non-resident shareholders. The amount of investment income is calculated by using a flat 18% rate of return on net assets of the business activity. The remainder of business income is taxed as earned income. For corporate shareholders partnership income is regarded as regular business income and taxed at the flat rate of 29%.

Shareholder financing
In general, all interest expenses are fully deductible for Finnish tax purposes, whereas dividends are not tax-deductible. Since non-residents are not liable to withholding tax on interest payments on loans granted from abroad to Finland, which are not considered as capital investment assimilated to the debtor’s equity, financing a company through debt rather than through equity may be a lucrative option in some cases.

Even though the Finnish tax law contains the above-mentioned provisions regarding the borderline between loans on one hand and equity on the other, and general arm’s-length requirements, one cannot say that Finland has formal thin-capitalisation rules. Accordingly, if well planned and documented in advance, non-resident shareholders may freely decide on the financing of their Finnish companies. Under certain conditions, even debt-to-equity ratios of 15:1 have been accepted.

Loss relief
Tax losses may be carried forward for ten years in Finland. A more than 50% (direct or indirect) change in the ownership of a company causes that the right to carry forward its losses will lapse. Companies may, however, apply for permission from the revenue to utilise their losses despite the changes in their ownership.

Consolidation
Group contributions between affiliated Finnish companies may be deducted from the contributing company’s profit and added to the recipient company’s profit if the parent company owns at least 90% of the affiliated company; if neither of the companies is a savings bank, financial, insurance or pension institution; if both companies have the same accounting periods; if the contribution is recorded in both companies’ accounts; if the transfer is not directly related to the companies’ mutual business and is not a capital investment; and if the contribution does not exceed the contributor’s profit from business activities.

Mergers
The Finnish Main Business Income Act complies with the EU’s Merger Directive. Under the Directives rules, in practice, crossborder mergers, divisions and transfers may be conducted without direct tax consequences for the companies concerned or their shareholders. After joining the EU Finland implemented the provisions of Directive so that the same rules apply in domestic cases also.

Taxable income and rates

Taxable income defined
Finnish companies are taxed on their worldwide income (non-resident companies are taxed only on income sourced in Finland). A Finnish branch (note: deleted because subsidiary is a Finnish company) of a foreign company is treated as a Finnish company for corporate income tax purposes.

Taxable income is the profit from the audited annual income statement determined by deducting all expenses from gross financial income with adjustments for non-taxable and non-deductible items. Besides business income, capital and foreign-exchange gains are taxed as ordinary taxable income.

Dividends received from abroad by Finnish companies are exempt from corporate income tax if there is a treaty between Finland and the remitting foreign country and if the Finnish company controls at least 10% of the voting power or 25% of the equity in the foreign company. Interest and royalties received from abroad by Finnish companies are subject to the 29% corporate income tax. Credit is allowed for taxes paid abroad.

Deductions normally include business expenses incurred to generate the company’s income, payments of interest on business loans and royalties, value-added tax, foreign-exchange losses, half of entertainment costs, reasonable donations, irrevocable orders to buy goods, doubtful sales receivables, organisation establishment or reorganisation costs, research-and-development expenses and employers’ social contributions (covering such items as sickness allowances, insurance and pensions). In computing taxable income, companies may also deduct the group contribution given to affiliated companies. Dividends paid are subject to the imputation taxation principle. Income taxes, expenses not necessary for generating a company’s income and excessive compensation paid to shareholders are non-deductible.

Losses may be carried forward and deducted from profits during the ten subsequent fiscal years. Losses may not be carried back. Subsidies are taxable income.

Depreciation
Assets may be depreciated for tax purposes using the declining-balance and straight-line methods. The method used depends on the type of asset, and companies may switch from one method to the other. In practice, assets may be depreciated at a slower rate for tax purposes than for accounting purposes but not at a faster rate.

Industrial buildings, machinery and movable equipment must normally be written off using the declining-balance method. The maximum depreciation rate for industrial buildings, shops and warehouses, regardless of building material, is 7% (4% for office and residential buildings). The depreciation rate for non-fixed assets (like machinery and equipment) is 25%. Assets with a useful life of less than three years may be written off in the first year. Minor assets (maximum value €850) may be written off in the first year (total annual maximum value €2,000) even if the useful life exceeds three years. Some assets (eg patents, copyrights, trademarks and other intangibles) may be depreciated only by the straight-line method, within ten years. Goodwill must generally be depreciated by the straight-line method within a maximum of ten years. If the taxpayer proves that the economic lifetime of goodwill is less than ten years, the depreciation may be taken during the lifetime of the goodwill.

Research-and-development expenditures may be written off in the year incurred or over two or more years. Laboratory and research-related buildings, however, are depreciated at a maximum annual rate of 20% by the declining-balance method. Equipment and machinery used to improve environmental conditions may be depreciated by the straight-line method at a maximum annual rate of 25%.

Assets other than inventories may be revalued for accounting purposes without tax liability on their incremental value. For example, the value of real estate may be increased to raise share capital without requiring contributions from shareholders. Small and medium-sized companies in regional-development areas are entitled in 2001–03 to an accelerated depreciation rate of 50% on investment (besides normal depreciation) in fixed assets acquired when establishing new production plants and tourism enterprises or those associated with a major extension and renovation of an existing enterprise. The depreciation can be taken for the year when the assets are placed into use and the following two fiscal years.

Proposed amendments to corporate and dividend taxation. On May 19th 2004 the Finnish government submitted a proposition to change the laws considering corporate taxation. According to the bill, from 2005 the corporate tax rate would be 26%.

The government presented a significant corporate tax reform bill to the parliament on May 19th 2004. The proposals are mainly based on the government’s political agreement published on November 13th 2003, but the bill also includes several new proposals designed to make the tax system more competitive and favourable for economic operators and foreign direct investment (FDI). The bill is expected to be enacted at the beginning of parliament’s autumn 2004 session. The most significant changes, which unless otherwise indicated will apply from January 1st 2005, are summarised below.

The corporate income tax rate will be reduced from 29% to 26%. The rate of individual income tax on income derived from capital will also be reduced from 29% to 28% (as opposed to earned income, which will remain taxable at progressive rates of up to approximately 55%). In addition, the general withholding-tax rate on interest (unless exempt) and royalties paid to non-residents will be reduced from 29% to 28%.

Taxation of dividends
The current imputation system, which has applied since 1990, will be replaced by a classical double-taxation system, under which corporate income will first be taxed in the hands of the company and dividends subsequently (with partial relief) in the hands of the shareholders at the appropriate rates. As a corollary to this, the equalisation tax (29/71) on distributions will be abolished. In many cases, this will enable a more tax-efficient and flexible profit repatriation from Finland.

Corporate shareholders. Under the new system, the cascading effect of the taxation on intercompany dividends will be eliminated by a participation exemption. Generally, dividends from resident and non-resident companies will be exempt from tax in the hands of resident corporate shareholders. Intercompany dividends will nevertheless be taxable if:

* The distributor is a non-resident company other than a company listed in Art. 2 of the EC Parent-Subsidiary Directive;

* The recipient is a financial institution holding the shares as investment assets;

* The shares of the (domestic or foreign) company distributing the dividends are publicly traded and the recipient, being an unquoted company, owns less than 10% of the distributing company’s capital. This is intended to counter the avoidance of tax on dividends from quoted shares by interposing a private holding company between the shareholder and the distributing quoted company. If the exclusion applies, the recipient company will be liable to tax on 75% of the dividends received; or

* The dividends constitute a hidden profit distribution.

If the dividends are received from non-EU companies, Finland’s tax treaties usually extend the participation exemption to dividends from treaty countries. For dividends received from EU companies (see (1)), there will be no degree of ownership or holding period requirements. Accordingly, as a general rule, even portfolio dividends from unquoted EU companies will be exempt. In addition, for financial institutions (see (2)), dividends from shares belonging to investment assets will be capable of being exempt if the institution holds more than 10% of the capital in an EU company listed in Art. 2 of the EC Parent-Subsidiary Directive.

Individual shareholders. The rules at the individual shareholder level will continue to differ depending on whether the dividends are from quoted or unquoted companies. Specifically, 30% of the dividends from a quoted company will be exempt, with the remaining 70% taxed as the shareholder’s income from capital (at 28%). For dividends from an unquoted company, dividends representing an annual yield of up to 9% of the company’s net worth will also be exempt. The amount for dividends so exempt will, however, be limited to €90,000 a shareholder per year. In addition, 30% of any dividend receipts exceeding €90,000 (subject to a 9% maximum) will be exempt, with the remaining 70% taxed as the shareholder’s income from capital (at 28%). Finally, 30% of dividend receipts in excess of the 9% yield ceiling will be exempt, with the remaining 70% taxed as the shareholder’s earned income (at progressive rates). As corporate profits are still taxed at 29% in 2004, a transitional provision will reduce the overall tax burden on dividends received from profits realised in 2004 but received in 2005, ie for dividends received in 2005, the taxable proportion will be 57% instead of 70%.

Withholding tax on outbound dividends. Many of Finland’s treaties contain a provision under which withholding tax is not levied on dividends paid to non-residents, regardless of the degree or period of ownership as long as individual resident shareholders are entitled to an imputation credit on dividends paid by a Finnish company. As a result of the abolition of the imputation credit, dividends paid after 2004 will be subject to withholding tax at the appropriate treaty rates (unless exempt under the EC Parent-Subsidiary Directive).

Capital gains and losses
The most significant proposal not included in the government’s political agreement of November 13th 2003 is the exemption of capital gains and, correspondingly, the denial of a deduction for capital losses under certain conditions. The new rules would, if adopted, apply from May 19th 2004 when a corporate taxpayer sells fixed assets shares that are deemed to belong to its business income (as opposed to passive income) basket if:

* The company has owned at least 10% of the share capital in the entity, the shares of which are held for at least one year and the alienation does not take place more than one year after a company’s ownership in the entity falls under the 10% threshold;

* The alienated shares are not shares in a real estate or limited-liability company the business activities of which principally consist of governing or owning real estate; and

* The company the shares of which are alienated is a Finnish company or a foreign company listed in Art. 2 of the EC Parent-Subsidiary Directive or a company resident in a treaty country in respect of dividends to which the provisions of the treaty would apply.

Several anti-avoidance (recapture and clawback) rules are proposed to minimise tax avoidance. Under these rules, capital gains are, inter alia, either partly or fully taxable if they arise due to previously taken deductions for write-offs. To ensure symmetry in tax treatment, the government proposes that capital losses derived from the sale of shares that could be alienated tax free should not be tax deductible. This symmetry is, however, not perfectly achieved as, in some cases, the denial of tax deductibility is extended to shares in respect of which capital gains remain taxable, eg for shares held in tax-haven companies. Capital losses arising from the alienation of shares belonging to fixed assets that are not tax-exempt may only be set off against taxable capital gains in the year of the alienation or the next five years.

Liquidation losses and write-offs on shares and receivables
With the introduction of the exemption for capital gains, the government proposes significant limits on the option to claim deductions for liquidation losses. Specifically, corporate shareholders may only deduct these losses if their ownership in the liquidated company is less than 10% and they have held the shares for more than one year. An exception is a loss incurring from a liquidation of a real-estate company. Liquidation losses remain deductible for individual shareholders. Taxpayers may not deduct write-offs for any shares belonging to the fixed assets and (other than sales) receivables that they have from companies in which their shareholding is at least 10%. A similar denial of tax deductibility applies to hidden group contributions that Finnish parent companies have, under established case law, been able to give to their loss-making foreign subsidiaries, eg in the form of lower transfer prices or non-interest-bearing loans. If adopted, these rules would apply from May 19th 2004.

Taxes on dividends
Dividends paid are subject to the imputation system, under which a company distributing profits will pay corporate income tax in 2001 equivalent to at least 29/71 of the dividends distributed. If the tax payable by a company under the normal tax rules in 2001 is less than 29/71 of the distributed profit, the difference will be levied as an additional compensatory tax (equalisation tax). If a company’s income tax in 2001 exceeds 29/71 of dividends distributed, the difference (tax surplus) may be used during the following ten years if the tax based on taxable income is less than the minimum tax.

No equalisation tax is levied in case the so-called flow-through dividend regime applies. Under very complex provisions (which have been applied since tax year 2001), Finnish companies may, in some cases, distribute their tax-exempted foreign dividends onwards to their non-resident shareholders without triggering Finnish equalisation tax liabilities.

Of all non-residents in Finland, only Irish residents are under certain conditions entitled to imputation credit (ie refund of the taxes paid by the distributing Finnish company) in cases in which a Finnish company distributes dividends abroad.

The future of the Finnish imputation system (that is as a main rule only applied in domestic cases) is to be decided in the near future by the European Court of Justice since there is a case pending before the court concerning the possible restrictive/discriminatory character of the current system.

The European Union’s parent-subsidiary directive is applied to direct investment dividends between Finland and other EU countries. Thus, in practice, such dividends will no longer be taxed. Absent a tax treaty, dividends paid from a Finnish subsidiary to a non-EU foreign parent face a 29% non-refundable withholding tax. Branch-profit transfers from Finland to a foreign parent are tax-exempt. Dividends paid by a domestic company to another domestic company or a resident individual are not subject to a withholding tax. Under tax treaties, most foreign recipients pay lower withholding tax or none at all.

Taxes on interest
There is no withholding tax deducted from interest payments to non-resident companies or to financial or other institutions. Interest paid to resident companies or institutions is not subject to withholding tax. Interest paid by banks or other financial institutions to resident individuals is subject to a 29% withholding tax in 2001 unless tax exempt.

Taxes on royalties and fees
Royalty payments to non-residents are subject to a 29% withholding tax that constitutes the final tax obligation. Most treaties reduce or eliminate the tax. Royalties paid to Finnish companies are not subject to withholding tax but are included in the recipient’s taxable income. The company making the payments to affiliates may deduct them from its taxable income as business expenses if they are at arm’s length.

Capital gains taxation

Capital gains on the sale of assets used in a business are taxed as ordinary income at the uniform 29% tax rate, regardless of duration of ownership. Capital losses are deductible from taxable income. The Finnish Main Business Income Act complies with the EU’s Merger Directive. Under the Directives rules, in practice, crossborder mergers, divisions and transfers may be conducted without direct tax consequences for the companies concerned or their shareholders. Finland implemented the provisions of Directive into its tax laws so that they apply also in internal situations.

Foreign income and tax treaties

Finland has double-tax treaties with more than 60 countries. New treaties have been signed (but not ratified) with the Kyrgyz Republic, Kazakhstan, Macedonia, Slovenia and Vietnam. Treaties with Egypt, France, Germany, Hungary, Italy, Malaysia, Morocco and Spain are being renegotiated. New treaty negotiations are under way with Armenia, Azerbaijan, Chile, Lebanon, and Tunisia.

Under domestic law Finland applies credit method to relief juridical double taxation. The same policy has also been applied in most of its tax treaties. There are, however, still some older treaties in place that are based on the exemption method.

As regards economic double taxation in crossborder situations, Finland has incorporated a different approach since dividends from direct investments are under certain conditions (10% ownership from the voting power or 25% ownership from the equity of the distributing company) exempted in the hands of resident corporate shareholders provided that there is a tax treaty in place between Finland and the resident country of the distributing company.

Transfer pricing

Planning for methods, documentation, penalties and other transfer-pricing issues is a complex undertaking. Local companies may deduct from taxable income such payments as those for direct purchases, shared expenses and management fees to affiliates if they do not exceed normal cost.

The Finnish tax law is not very sophisticated with respect to transfer-pricing issues. But for the generally incorporated arm’s-length principle and rapidly developing case law there are no specific rules, eg on the implementation of the arm’s-length principle or transfer-pricing documentation requirements, etc.

Since specific domestic rules are lacking, the Finnish revenue and courts usually follow strictly the principles laid down by the OECD in its reports. This holds true also with respect to selecting/accepting selected transfer-pricing methods.

It should also be noted that Finland is likely to incorporate detailed transfer-pricing documentation requirements in the near future.

Turnover and other indirect taxes and duties

The central legislation on value-added tax (VAT) is the Value-Added Tax Act. The Finnish VAT system has been harmonised with European Union rules. Present VAT legislation grants extensive rights to deduct taxes on assets acquired for business purposes. Exporters may deduct tax without restriction from all their productive inputs (except personal cars and entertainment expenses). VAT in intra-EU trade is usually paid where the goods are consumed. Imports from non-EU countries are taxed at the place of importation.

All parties (individuals and legal persons) engaged in the commercial sale of goods and services in Finland are subject to VAT. In practice, VAT is levied, irrespective of the type of business, on the commercial sale of goods and services and on imports and on the intra-EU acquisition of goods, unless explicitly exempted in the VAT act. When calculating VAT payable, the payer deducts the VAT included in the prices of goods subject to VAT purchased from another party. The goods and services concerned must be used for taxable business activities of the taxpayer. If exempted, the seller does not pay VAT on sales; he may not, however, deduct VAT included in the purchase prices of his production inputs. No VAT is levied on businesses with annual turnover of less than €8.500 during a calendar year. This threshold does not apply to foreign entities.

The standard VAT rate on goods and services in Finland is 22% of the whole transaction. The rate on foodstuffs and animal feeds is 17%. An 8% VAT rate applies to sporting facilities, cinema admission tickets, pharmaceuticals, books, passenger transport, accommodation services, admissions to cultural events and facilities, and licence fees of the Finnish Broadcasting Company.

Tax-exempt goods and services include the sale, letting and leasing of immovable property (but construction services are taxable); health and medical care; social welfare services; education; most financial and insurance services; performance fees; assignment of real estate; certain copyrights; and lotteries and gambling. Certain “zero tax rate” sales categories are not subject to VAT, although the VAT included in the prices of related production inputs may be deducted. These include sales abroad, intra-EU sales, newspaper and magazine subscriptions, and certain vessels and aircraft.

Excise taxes are levied on alcohol (ethyl), alcoholic beverages (beer, wines, intermediate products such as aperitifs and spirits), soft drinks (lemonades, juices, mineral water), mineral oils, tobacco, cigarette paper and other cigarette products, coal, milled peat, electricity, natural gas, pine oil, certain lubricating oils, land filling and drink containers. The tax rates are available from the National Board of Customs.

Tax-free sales on internal EU travel ended in July 1999. But tax-free sales continue on shipping between Finland and Sweden if the ships call at the Aland Islands.

Other taxes

Passenger cars, vans and motorcycles are taxed before they are registered or put into use.

A general tax is levied on all real estate in Finland, with exemptions for forests and farmland. Each municipality annually determines two tax rates that are levied on the taxable value of the property. The general rate, applicable to land and real estate not used as permanent residences, is 0.5–1%, depending on the municipality. The rate for permanent residences is 0.22–0.5%. A new feature for the 2001 tax is the introduction of a general tax on “non-building” land (where the landowner is neither willing to build on nor sell the land) or real estate. The tax is 1–3%, depending on the municipality. The purpose of the levy is to accelerate the use of non-build land in densely populated metropolitan areas.

Share transfers outside the Helsinki Stock Exchange are taxed at 1.6%. Real-estate transfers bear a uniform 4% transaction tax regardless of the type of property. A VAT of 22% is imposed on insurance premiums.

Tax compliance and administration

Early every calendar year, companies receive an advance assessment of national and local income taxes, based on the previous tax year’s returns. Tax payments are normally made in monthly instalments. Final adjustments are made at the end of the following year. Companies must file their tax returns within four months of the end of their accounting period. An announcement on moving the accounting period to a later date must be made one month before the old accounting period would have ended. If the end of the accounting period is being moved forward, the announcement must be made one month before the new end of the accounting period.

PERSONAL TAXATION

Taxable income and rates

Finns face a high personal tax burden, particularly when taken together with municipal tax, church tax and social insurance contributions. The Finnish government recognises this and has been reducing marginal tax rates and social insurance contributions. It calculates that the tax burden on the average worker will shrink by 2 percentage points between 1999 and 2003, when the current government leaves office.

According to the OECD, the average effective tax rate on earned income (inclusive of municipal taxes) in 2001 inclusive of social security contributions for someone with income equal to earnings of the average production worker was 33.7%. This is lower only than Germany, the Netherlands or Sweden in the EU. For someone with income of twice the earnings of the average production worker, the average effective rate in 2001 was 43.1%. This is lower only than Germany.

According to the Ministry of Finance, Finns (including companies) are expected to pay 44.6% of GDP in taxes (including taxes on unearned income, indirect taxes and social security contributions) in 2002 and 43.9% in 2003.

In the 2003 budget the government announced plans to lower all marginal tax rates on central government income by 0.3 percentage points (following a 1-percentage-point drop in 2002), raise the income thresholds by 1%, increase the deduction for work-related expenses and the earned income allowance in municipal taxation. This will be offset to some extent by an increase in municipal taxes.

A working group on developing income taxation that reported to the government in November 2002 recommended a number of reforms to ensure “that Finland remains an attractive country to work in for highly educated, professionally skilled workers”. Implementation of the recommendations is likely to be a matter for the next government to be elected in 2003.

Spouses file separate tax returns. Joint filing and income splitting are not possible. Tax returns are filed on a calendar-year basis by the end of January each year. However, instead of a traditional tax return, many taxpayers receive a tax proposal, which is a pre-completed return containing information reported to the tax authorities by the payers of the income. The taxpayer must review and complete the return and file it in June each year. For individual taxpayers, a tax year is the same as a calendar year. For earned income, tax is normally deducted at source by the employer and an adjustment is made when the return is filed.

State income tax rates for 2004 vary from 0% to 34% (down 1.5 percentage points in 2004 compared with 2003). Municipal tax rates (on earned income only) are 16–20% for 2004. These rates apply to both residents and non-residents. Members of the Evangelical Lutheran Church or the Orthodox Church are also liable for the 1–2.25% church tax, depending on domicile.

The first €11,700 of earned income after deductions is tax-free in state taxation. There are five tax brackets of 11%, 15%, 21%, 27% and 34% on incomes of €55,800 or more. When municipal and church taxes are added in, the highest marginal rate is 56.25%. The working group on developing income taxation, which reported in November 2002, recommended that over the period 2004–07, the highest marginal rate be brought down to 50%. There is a cap of 70% of income on tax liability. Such a high liability may arise if individuals have high net wealth.

Fees paid for lecturing at an event organised by a university, school or other Finnish entity are considered earned income. Scholarships and grants are tax-free, with certain upper limits in place for private grants and scholarships. A 35% flat tax rate applies to foreign non-resident students who take jobs in Finland. International tax agreements also have provisions on tax relief for students. Teachers and researchers from certain countries may be entitled to full tax exemption on the basis of international tax agreements and where, for example, their income is from a grant or scholarship in their home country. (Exemption may even apply to persons residing in Finland for more than six months.)

Determination of taxable income
Finns are taxable on worldwide earned and unearned income. Tax treaties provide relief from dual taxation. Income tax, municipal and church taxes are payable on earned income; flat-rate tax is paid on investment income; and net-wealth tax on worldwide assets. The working group on developing income taxation has recommended that the net wealth tax be abolished as part of a restructuring of the tax system.

In general, expenses arising from acquiring and preserving either earned or investment income are deductible from the relevant taxable-income calculation.

Expenses incurred in excess of €500 for travelling to and from work are considered to be expenses for acquiring or maintaining taxable income and thus they are deductible up to €4,700 from earned income. A standard deduction of €620 is available to everyone. Statutory pension insurance and unemployment insurance premiums are deductible in full. The deductibility of voluntary pension insurance premiums is limited to an amount depending on the nature of the insurance (€8,500 or €5,000). Voluntary individual pension contributions to foreign pension schemes are deductible only for the first three years of residence in Finland. The working group on developing income tax recommended that deductions also be available for savings in investment funds.

Interest on loans is deductible from capital income if the loan was used to buy a permanent home or property that is used to acquire income. Interest payments are deducted from investment income. Capital losses are deductible from capital income. Medical expenses and alimony are not deductible, but there is a deductible maintenance allowance of €80 per child from earned income for each child living with a former spouse.

Tax credits, to be offset against earned income in the tax year, are available for any deficit on investment income. The credit is equal to 29% of the deficit, capped at a level of €1,400. The maximum amount is increased by €350 for one child and by €700 for two or more children. If the cap has applied, the remaining portion of the deficit may be carried forward to future ten tax years.

Residents’ taxable income from a business enterprise or shares in an unlisted company is split into investment income and earned income. Investment income includes dividends, interest, royalties, capital gains and rental income. The amount of investment income is calculated by using a flat 13.5% rate of return on net assets of the business activity. The rest of business income will be taxed as earned income.

The imputation-taxation principle is applied to residents’ dividend income. The combined tax burden of a company and an individual recipient of dividends is equivalent to the 29% that is the rate of tax on investment income because the investor receives a tax credit pro rata to the company’s effective rate of tax. As of January 1st 2005 Finland will drop dividend imputation and move to a classical system of dividend taxation.

Under the current system, the recipient of dividends often does not pay tax on dividends if the company’s effective tax rate is equal to the rate of corporation tax (29%). However, some foreign-sourced dividends are subject to double taxation. Non-residents are subject to a 29% withholding tax and are not eligible for tax credit under the imputation system except in the case of Ireland, the only country with which Finland has a tax treaty making this possible.

Residents’ foreign and domestic interest income on bank deposits and bonds are treated as investment income and taxed at 29%. Foreign interest income must be declared. Interest income earned domestically must be declared unless it is tax exempt or subject to withholding tax. Non-residents are not subject to withholding tax on their interest income on bank deposits and bonds.

Royalty income is taxed as investment income at a flat rate of 29% if the industrial right (patent, trademark, copyright) has been bought or inherited by a resident. The resident inventor’s royalty from an invention is taxed as earned income. Non-residents are subject to 29% withholding tax for their royalty income, unless otherwise specified in a tax treaty.

Residents’ capital gains from property sales are taxed at the 29% uniform investment-income rate regardless of duration of ownership and mode of acquisition.

The acquisition-cost assumption for profits from the sale of property that has been owned for at least ten years is 50%. For property owned less than ten years, the acquisition-cost assumption (for shares and property) is 20% (or real acquisition cost if greater). Sale proceeds of an owner-occupied dwelling are tax exempt if the owner has occupied it for at least two years before the date of sale. Capital losses can be set off against capital gains during the year in which they are realised and three following years.

Net wealth tax of €80 is paid on net value of assets of €185,000. Any amount above this is taxed at a rate of 0.9%. Domestic bank deposits are tax-exempt in calculating net wealth if the interest income on the account (or bond) is subject to the 29% withholding tax at source.

Residency

For income-tax purposes, individuals are considered residents if Finland is their principal place of abode or they have stayed there for a continuous period of at least six months. The stay in Finland might be regarded as continuous in spite of a temporary absence (up to two months) from the country. It does not matter whether the period falls within a calendar year or straddles two calendar years. The criterion for the net-wealth tax is residence at the end of a calendar year.

Special expatriate tax regime

A foreign expert with special expertise may choose to be taxed at a flat rate of 35% if his or her monthly cash salary exceeds €5,800. No deductions are allowed in the special expatriate tax regime. The regime can also be applied to teachers and researchers of universities, colleges or other upper level schools. Teachers and researchers do not have the minimum monthly cash salary requirement of €5,800. This concession is available only for 24 months. It is not available to anyone who has been resident for tax purposes in Finland in the previous five calendar years.

Capital taxes

Branches of non-resident companies pay an annual capital (net wealth) tax of 1%, levied on all property in Finland except bonds, bank accounts and foreign trade credits. Resident companies (including foreign-owned subsidiaries) and other entities, whose shareholders or members are assessed for national income and personal-net-wealth taxes, do not ordinarily pay this tax. Non-residents covered by tax treaties that contain a clause ruling out discrimination are exempt from the tax.

Source: Expat Finland


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