When work is done by someone who has a valid registration in the prepayment register, the payor does not need to withhold tax on the compensation (such as royalties, trade income or other nonwage compensation). However, if money is paid in the form of wages, the payor must always withhold tax on it even though the beneficiary is on the register.
The guidance on these pages is for private individuals as well as corporations including the self-employed (T:mi) who operate a trade or business and all types of corporate entities that operate a business.
Who can be registered?
The prepayment register is one of the registers of the Tax Administration. If you are a self-employed individual, a company or a corporate entity and you operate a trade, business, farm or other activity that generates income, the Tax Administration can enter you in the register.
It is not necessary for you to have started the operation when you ask for registration. It is enough if you are going to start it as you have planned. However, if your operation clearly has the characteristics of a hobby activity, the requirements for prepayment registration cannot be fulfilled.
There is no mandatory rule that would require a business to have a prepayment Registration. In fact, in some circumstances, the person who works can find it useful that the payor withholds taxes – so it may be desirable to not have a registration at all.
You can get a prepayment registration even if your only activity is that you receive royalties or run a simple commercial operation where you buy and re-sell goods.
However, not all requests for registration can be granted. For example, the Tax Administration rejects registration applications from taxpayers who have not filed their taxes or have not kept their books.
What is the purpose of the prepayment register?
If you are on the prepayment register, it has an impact on the way your taxes are collected from you during the ongoing year when you receive income. The purpose of being on the register is to inform payors that the payor does not have to arrange for tax withholding; instead, the beneficiary of the income, being prepayment-registered, will pay whatever advance payments are required.
If the payment is treated as being wages
In the case of wage payments (and sportsmen’s fees), payors must always withhold tax in accordance with the percentage rate showing on the beneficiary’s tax card. Wages paid to someone are also subject to the employer’s health insurance contributions.
Read more: When is compensation regarded as wages?
If you receive an amount of money generally regarded as wages for purposes of taxation, it is not important whether or not you are on the prepayment register. The provisions of the act on tax prepayments (Ennakkoperintälaki 1118/1996) define whether or not an amount of money is treated as wages.
If you receive nonwage compensation, trade income, or royalties
If your payor is paying you trade income (= nonwage compensation) or royalties, and you have a prepayment registration, your payor does not have to withhold tax. Because you are registered, you are expected to assume responsibility for your taxes and pay them to the Tax Administration independently. The amounts are calculated by the Tax Administration; i.e. prepayments are imposed in advance – before taxes are assessed for the tax year.
If the beneficiary is not on the prepayment register, payors are required to withhold tax also when paying out nonwage compensation, trade income, and royalties. However, payors do not have to pay the employer’s health insurance contributions.
The withholding requirement is not affected by who the beneficiary is: it may be a limited-liability company or it might as well be a natural person.
- When the work had been performed by a limited-liability company, by some other business entity, or by an organisation (e.g. by a corporate entity such as a cooperative, etc.; or by a general or limited partnership), the withholding rate is 13%.
- If it was performed by a natural person and compensation is paid to him or her, the payor must withhold tax in accordance with the percentage rate shown on the natural person’s tax card.
- If he or she fails to present the card, the payor must withhold 60%.
Before the payor calculates the amount to withhold, the VAT must be subtracted from the final sum of the invoice.
- Nonwage compensation i.e. trade income is the compensation paid for the performance of work, a one-off assignment, or for the rendering of a service.
- An amount of royalties is a compensation for use: it is typically paid in exchange of a copyright or of a similar intangible right.
Whether or not a service provider has a prepayment registration (when services have been sold to a household) has an impact on a household customer’s eligibility for the tax credit for expenses. The household that buys services can only be given the tax credit when the provider of services is prepayment-registered.
If goods are sold and purchased, or if rental property is offered for rent
The requirement to withhold tax on payments does not apply to purchases of goods or to rented goods or services. If a payor is settling an invoice that contains both nonwage compensation and payment for delivered goods, the payor must check whether the seller’s registration is valid: if it turns out that the seller is not prepayment-registered, tax must be withheld on the nonwage compensation amount (not on the value of the goods).