Income taxation of Finnish companies in other countries

If you plan to expand your business operations to other countries, it is important to know in advance which countries will have the right to tax your income and how the income you receive from abroad will be taxed. 

Finnish companies may be liable for income tax on business operations conducted in another country both in Finland and in the other country. Income received from abroad is taxed in Finland in accordance with Finnish tax legislation. 

Study the other countries’ tax legislation

When a Finnish company expands its operations abroad, the company’s tax assessment depends on what kinds of operations the company conducts in the other countries. In most situations, companies either establish a subsidiary or a branch office or they start conducting business operations directly, for example by working with local sales representatives.

• Know the other country’s tax rules: Each country has its own tax laws that are applied to the tax assessment of companies. The Finnish Tax Administration does not provide guidance on how the tax rules of other countries should be applied. Please contact the tax authority of the country in question for further information and instructions.
• Interpretation of tax treaties: If you are unsure how to interpret a tax treaty between Finland and another country, the Tax Administration can present their view based on Finnish tax assessment. However, please note that this interpretation is not binding to the tax authorities of the other country.

Establishing a subsidiary

A subsidiary is an independent company. If you expand your operations abroad by establishing a subsidiary in another country, the business income received by the subsidiary will generally be taxed only in the country where it was established or where it is registered.

However, the prices set for purchases and other business transactions between the subsidiary and the Finnish parent company must be based on the arm’s length principle, i.e. follow market pricing. Transactions between a parent company and its subsidiaries are subject to the regulations on transfer pricing. Most commonly, profit distribution from a subsidiary to the parent company takes place in the form of dividends.

Permanent establishments may be taxed in two countries

If you do not establish a subsidiary entity in another country, you may be treated as having a permanent establishment in the other country. For example, if you have a sales representative or a branch office in another country, the tax authorities of the other country are likely to consider this a permanent establishment.

Income received by a permanent establishment may be subject to tax in both the country the establishment is located in and in Finland. In Finland, income received from abroad is taxed as part of the Finnish company’s overall income. The part of the company’s business income that is considered to be derived from a permanent establishment is taxed as the permanent establishment’s income.

The country where the permanent establishment is located in may have the right to tax its income. The taxation rights are determined by the country’s legislation and the tax treaty between the country and Finland. 

If you are unsure whether your company will be treatead as having a permanent establishment in another country, contact the tax authority of the country in question. Finland and the other country may disagree on whether or not the business activities give rise to a permanent establishment. The company can request the countries’ tax authorities to resolve the matter by a mutual agreement procedure. 

Things to remember when expanding your business operations abroad