Foreign companies in Finland – income taxes

A permanent establishment is a place of business through which an enterprise carries out its operations. If you have a place of business in Finland that falls into one of the following categories, a permanent establishment may be formed:

• management offices
• local offices
• factories, production plants
• workshops
• mines, quarries, oil wells, natural gas wells, other sites for extraction of natural resources
• places with activity in the construction and installation sectors, lasting longer than 6, 12 or 18 months (the time limits vary in the tax treaties signed between Finland and other countries)
• locations where a 'dependent agent' works

To be held as a permanent establishment, the place of business must be fixed, not temporary or short-lived in terms of its geographical location and duration.

• Places of business can be located in the premises of another company, e.g. if there is a certain space or part of a space to be used on a regular basis.
• If an employee works from home, the situation may give rise to a permanent establishment.

In general, a foreign company is treated as having a permanent establishment in Finland if the fixed place in Finland is where its management and business administration are.

The place of management is the place where important operative and strategic decisions concerning the company's operations, for example, are taken. Such a place can be located in the home of a company director, or inside the premises of another company.

Sites where a construction, installation or assembly operation is performed may give rise to a permanent establishment. A permanent establishment is not formed unless the operations exceed the time limit set out in the tax treaty between Finland and the other Contracting State. The thresholds vary from 6, 12 and 18 months. For example, under the tax treaty between Estonia and Finland, any construction job that lasts longer than 6 months gives rise to a permanent establishment.

Construction, installation or assembly operations are regarded as having ended on the date when the job is completed or entirely abandoned. The duration of such a job is normally regarded as inclusive of any periods when temporary interruptions have caused some inactivity.

If the projects run by an enterprise in Finland are several, each one of them must be treated separately from the perspective of the above time limits. However, if the projects are connected with one another and if they amount to a single commercial and geographic whole, their durations may be added together. In the same way, if a project is artificially divided up into several parts, the partial projects will be considered as a single project.

Foreign companies may have a permanent establishment in Finland simply because there is a representative or agent working in Finland, even if no place of business is available to the company.

If the representative is a “dependent agent”, the representative’s operation may cause your company to have a permanent establishment in Finland, if you have given the representative the authority to enter into contracts and to receive orders on the foreign company’s behalf. In addition, for a permanent establishment to be formed, the representative must regularly, not just occasionally enter into contracts and receive orders. Typical examples of a “dependent agent” include a local company – or a natural person, a company employee – that sells the foreign company's products or services in Finland.

If the representative is an “independent representative”, the foreign company is not treated as having a permanent establishment. An “independent representative” is both financially and legally free from the foreign company, i.e. from the principal. Typically, intermediaries, brokers and commission merchants are independent representatives.

Preparatory and auxiliary activities do not give rise to a permanent establishment. Examples of preparatory and auxiliary activities:

• advertising
• data collection
• opening and running an information service office
• scientific research

For example, it does not constitute a permanent establishment for the foreign company when a place of business has only been set up for storage, commercial display, or delivery of goods belonging to that company.

However, to make a conclusion of whether a foreign company’s activities are preparatory and auxiliary, the actual circumstances of each case must be reviewed. If the foreign company’s activity in Finland is part of its “core” business, and is an important part of the foreign company’s business, a permanent establishment may be formed.

However, after-sales services offered to a customer of the principal enterprise are not usually regarded as preparatory and auxiliary activities. Examples of such services include repair work under warranty, and deliveries of spare parts to the customer, from a fixed place of business. They are considered an important part of the foreign company’s business. For this reason, they cannot be regarded as a preparatory and auxiliary activity.