Changes to the taxation of corporate entities' sources of income
Following changes in legislation, corporate sources of income will no longer be divided into personal and business sources. These changes will come into force on 1 January 2020 and they will be first applied in the assessment of tax year 2020.
After the changes in legislation have come into force, the income received by a corporate entity will be primarily assessed according to the act on the taxation of business income (Laki elinkeinotulon verottamisesta 360/1968) regardless of the nature of the corporate entity’s business operations. However, these changes do not apply to the tax treatment of agricultural operations. The taxation of agricultural income will still be carried out according to the act on agricultural income tax (Maatilatalouden tuloverolaki 543/1967).
Changes concern most companies
The changes in legislation only concern corporate taxpayers, such as limited liability companies and cooperatives. As a result, these changes will have no effect on the tax assessment of natural persons, self-employed individuals, general partnerships, limited partnerships or benefits under joint administration.
Some corporate taxpayers will remain unaffected by the changes, as well. The new legislation will not affect the taxation of non-profit corporations, public authorities, other entities partly exempt from tax under the act on income tax, foreign death estates, housing companies or mutual real estate holding companies. Corporate entities like these may still have three different types of income sources. The act on the taxation of business income will only be applied to these entities when they engage in business operations.
Personal sources of income will no longer affect taxation
These changes in legislation mean that the sources from which the company receives their income will no longer be divided into business sources and personal sources. After the changes come into force, assets that were previously considered part of a non-business source of income will be included among the company’s business sources of income as a new asset type, other assets. If the company has losses or capital losses from a personal source of income that have not been deducted yet, they can be deducted from the income from business sources during the time they are deductible.
Earnings from other assets, as well as expenses and losses related to the production of this income, are considered profits and losses relating to a business source of income. Expenses and losses can be generally deducted from the total amount of income received from business sources. However, the new rules restrict the deductibility of capital losses resulting from the sale of shares in partnerships and of shares in companies other than housing companies or real estate holding companies.
The definition of business operations will not change
The new legislation will not affect the definition of the concept of business for tax purposes. References to business operations in other legislation will still be considered to refer to a taxpayer’s actual business and professional activities.
Changes in other tax legislation
In addition to the act on the taxation of business income, changes have been made accordingly to the acts on income tax, taxation of group subsidies, taxation of residential property reserves, valuation of assets in tax assessment, and the elimination of international double taxation. For example, after the changes to the act on the taxation of group subsidies, most limited liability companies and cooperatives that are taxed according to the act on the taxation of business income can pay and receive group subsidies.
Changes will be first applied in the assessment of tax year 2020
The new legislation will be applied for the first time in the income tax assessment of tax year 2020. If the accounting period of a company ends on 1 January 2020 or later, the company’s tax assessment for that accounting period will be carried out entirely according to the act on the taxation of business income, regardless of the nature of the company’s business operations. Accounting periods that end by 31 December 2019 will be assessed according to the provisions currently in force.
Changes can be applied to prepayments as of 1 January 2020
The new taxation practices cannot be applied to prepayments imposed for tax years 2020 and 2021 until 1 January 2020. The Tax Administration does not adjust the prepayments that have been imposed before this date unless requested to do so.
If a corporate entity has income or undeducted losses from a personal source of income under the provisions currently in force, and it wishes for this to be calculated into the amount of taxable business income that is the basis for prepayments for tax years 2020 and 2021, the corporate entity is entitled to request adjustments to the prepayments starting on 1 January 2020. The request can be made in MyTax.
Starting 1 January 2020, MyTax will show your deductible losses from business activities and personal sources of income as you are filing an application for prepayments.
Tax year 2019
Prepayments of a limited liability company are based on income of €25,000 from a business source of income and €5,000 from a personal source of income. For tax year 2018, the company’s confirmed loss is €5,000 from business activity and €10,000 from a personal source of income. Because there is no taxable income left in the personal source of income after the previous losses have been deducted, prepayments are based only on the income from business activity. The prepayments amount to €4,000 (0.20 x (€25,000 – €5,000)).
Tax year 2020
Prepayments of a limited liability company are based on income of €30,000 from a business source of income. For tax year 2018, the company’s confirmed loss is €5,000 from business activity and €10,000 from a personal source of income. Because the losses from both the personal source of income and business activity can be deducted from the income on which the prepayments are based, the prepayments imposed amount to €3,000 in total (0.2 x (€30,000 – €5,000 – €10,000)).
If the company has received a decision on prepayments for 2020 before 1 January 2020, the decision does not take into account how the changes made to the division of sources of income affect the deduction of losses. The Tax Administration will not adjust the decision on its own initiative to be in line with the use of losses presented here. Instead, the limited liability company must request changes to its prepayments, if needed.
The Tax Administration will publish detailed guidance on the changes to corporate sources of income. Other instructions will be likewise updated to reflect the new legislation.