Taxation of key employees

This is an unofficial translation. The official instruction is drafted in Finnish (Avainhenkilöiden verotus, VH/6146/00.01.00/2023) and Swedish (Beskattning av nyckelpersoner, VH/6146/00.01.00/2023).

These instructions concern the taxation of individuals coming to work in Finland in cases where the Act on Key Employees (1551/1995) applies to the taxation of the individuals in question.

The amendments effective as of 1 January 2024 have been updated to this version of the guidance. In addition, some technical specifications have been added to the guidance.

For more information on the taxation of employees outside the scope of the Act on Key Employees, see the instructions Taxation of employees from other countries.

1 Introduction

The general rule is that when you come to work in Finland, you must pay the taxes on your earnings in Finland. The way in which your Finnish earnings are taxed depends on the length of your stay in this country, and on whether your employer is regarded as Finnish or as an employer based in another country. The provisions contained in international treaties governing taxation may also restrict Finland’s taxing rights.

An individual who comes to work in Finland is treated as a resident taxpayer (with full liability to pay tax), or as a non-resident taxpayer (with restricted liability to pay tax). Under section 9 of the Income Tax Act (1535/1992), individuals who reside in Finland and individuals who live in other countries but stay in Finland for more than six months are considered resident taxpayers. Individuals who reside abroad and individuals who stay in Finland for less than six months are considered non-resident taxpayers (section 11(1) of the Income Tax Act). For more information on residency and non-residency, see the Finnish Tax Administration instructions Tax residency, non-residency and residency in accordance with a tax treaty – natural persons.

The income earned by resident taxpayers is taxed in accordance with the Act on Assessment Procedure (1558/1995) and the taxation is based on a progressive tax system. The provisions of the Act on the Taxation of Non-residents’ Income and Capital (627/1978; hereafter the Tax at Source Act) apply to non-resident taxpayers and a tax at source is collected from their earnings. However, a tax at source of a key employee can be collected from the earnings of a key employee even if the individual in question is a resident taxpayer in Finland.

2 Foreign key employees

2.1 Applicable legislation and prerequisites for application

Taxation of foreign key employees is governed by the Act on Source Tax of Foreign Key Employees (1551/1995; hereafter the Act on Key Employees). Foreign individuals coming to Finland for periods longer than six months and who are granted the status of resident taxpayers are in certain cases treated as foreign key employees who only pay a tax at source of 32 per cent on their wage income.

If an employee coming to Finland must pay municipal income tax on their wage income to a municipality in the Province of Åland, the tax at source is 14.5 per cent. In addition to the tax at source on wage income, key employees residing in Åland must also pay municipal income tax under the Income Tax Act and the Municipal Income Tax Act of Åland (ÅFS - Ålands författningssamling 119/2011).

The Act on Key Employees will only apply if

1. the individual in question becomes a resident taxpayer in Finland when starting work in Finland;
2. the individual in question is paid at least €5,800 per month for this employment for the entire period of work;
3. the individual in question works in tasks requiring special expertise; and
4. the individual in question is not a Finnish citizen and has not been a resident taxpayer in Finland during the five calendar years preceding the employment start year (section 2 of the Act on Key Employees).

If the foreign employee in question works as a teacher in a Finnish university or other higher education institution or conducts scientific research for the common good and not for the benefit of a specific individual or organisation, the Act on Key Employees can also be applied even if the requirement for a salary of €5,800 is not met. Moreover, it is not necessary to separately consider the requirement for special expertise in the case of teachers and researchers.

The Act on Key Employees can only be applied if the individual in question is a resident taxpayer in Finland. This means that the individual in question must have a permanent residence and home in Finland or they must stay in Finland for a continuous period of more than six months (section 11 of the Income Tax Act). The period of stay can be considered continuous even if the individual in question is temporarily absent from Finland.

The Act on Key Employees only applies to individuals who achieve the resident taxpayer status in Finland as they start work as employees meeting the requirements of the act. The Act on Key Employees cannot be applied to individuals who have become resident taxpayers in Finland as a result of such factors as frequent work-related trips to Finland, even if they would later be employed in tasks that would otherwise meet the requirements of the act.

However, in practice, the Act on Key Employees can be applied if the individual in question arrives in Finland shortly before the start of the work and already becomes a resident taxpayer in Finland on their arrival. Such a situation often arises when an individual moves to Finland one or two weeks before the start of the employment so that they can finalise all practical arrangements before starting work.

The purpose of the Act on Key Employees is to promote the employment of persons with special expertise in Finland. The concept of special expertise is not defined by law. According to the preliminary work for the Act, special expertise refers to persons whose knowledge or skills are important for developing production, trade and industry, or research in Finland (Finance Committee Report 45/1995). In taxation, athletes have not been considered special experts as referred to in the Act on Key Employees. If the other requirements are fulfilled, however, coaches can be deemed to be acting in special expertise tasks. More information about income from sports is available in the Tax Administration instructions Taxation of income received from sports in international situations.

2.2 Wage income under the Act on Key Employees

The provisions of the Act on Key Employees apply to pay that is defined in the Income Tax Act as income earned in Finland. This requires that at least most of the work is performed in Finland for an employer based in Finland (section 10(4) of the Income Tax Act). However, in the following situations, the income is considered income earned in Finland even if most of the work has been performed outside Finland:

• the wage income has been paid by the State of Finland, a Finnish municipality or other body governed by public law (section 10(3) of the Income Tax Act)
• the remuneration has been paid to an individual who is a member of the Board of Directors or other similar governing body of a Finnish corporate entity (section 10(4)(a) of the Income Tax Act)
• the wage income has been paid by a foreign employer for work performed in Finland when the foreign employer had leased out the worker to a service recipient in Finland under an employee-leasing contract (section 10(4)(c) of the Income Tax Act).

Whether or not the key employee in question has mainly worked in Finland is examined for each tax year separately. Because key employees are resident taxpayers, they are, in principle, also liable to pay tax on income that they have received for work performed outside Finland. For this reason, the review period applied to resident taxpayers is different from the one used for non-resident taxpayers. In the case of the latter group, the question of whether the work is mainly performed in Finland is examined by pay period, as ruled by the Supreme Administrative Court (for more information, see section 2.1 of the instructions Taxation of employees from other countries).

Under current case law (ruling no. 2943 of the Supreme Administrative Court of 11 November 2005), a Finnish service provider (such as an accounting firm) paying the wages and collecting the tax at source on behalf of a foreign employer is also considered a Finnish-based employer for the purposes of the Act on Key Employees.

3 Taxation at source of key employees in practice

3.1 Applying for a tax at source card and collecting tax at source

A key employee must apply for a tax card for the collection of tax at source from the Finnish Tax Administration within 90 days of the date on which the work referred to in the Act on Key Employees has started.

Until the end of 2023, the Act on Key Employees was applicable for a maximum of 48 months from the beginning of the work period. Starting 1 January 2024, the maximum period of work allowed by the Act is extended to 84 months. The change applies to persons starting work under the Act on Key Employees in Finland on 1 January 2024 or later, and to key employees who are already working in Finland and whose 48-month maximum period of work does not end until after 31 December 2023.

If the work under the Act on Key Employees continues for longer than planned and a key employee's tax card has been issued for less than 84 months, the tax card’s period of validity can be extended. The application for extension must be submitted in writing within 30 days from the end of the validity period of the previous key employee’s tax card. A new card can be issued for up to 84 months starting from the start of the original period of work.

The tax at source is collected as a final tax: the employer deducts the tax from the salary and pays the tax to the Finnish Tax Administration. No health insurance contribution of the insured individual is collected from the employee.

A key employee’s tax-at-source card has an effect only on the collection of tax and the employee’s health insurance contribution. Other statutory social insurance contributions must be paid according to the applicable rules. For example, the employer must usually pay the health insurance, pension insurance and other insurance contributions normally unless the foreign key employee presents an A1 certificate or the like.

Sometimes the tax at source has not been withheld from the key employee at the time of wage payment, and the tax must therefore be imposed separately. Typically, such situations may arise if the key employee has exercised employee stock options that were granted to them before they arrived in Finland and when they were still working for a foreign employer, and the Finnish employer has not been obliged to withhold tax on the stock option benefit. If the key employee’s tax at source has not been collected at the time of wage payment, the taxpayer must report the income on their tax return so that the tax at source can be imposed (Finnish Tax Administration decision on information reported on a tax return VH/4437/00.01.00/2022).

For more information on the taxation of employee stock options granted to a key employee, see section 3.5 of the Finnish Tax Administration’s instructions Taxation of employee stock options and employee offerings in cross-border circumstances. For more information on imposing the tax at source, see the instructions Tax at source procedure applied to a non-resident taxpayer’s income and a key employee’s wage income.

3.2 Taxation of key employee’s other earned income

The other earned income paid to an individual receiving wage income under the Act on Key Employees is taxed in Finland on a progressive basis as laid down in the Act on Assessment Procedure. Wage income paid under the Act on Key Employees is considered for the same period in accordance with the exemption method so that the key employee’s wage income increases the progression of other earned income (section 6(1) of the Act on Key Employees).

If the individual in question only receives wage income in accordance with the Act on Key Employees during the early part of the year and all other earned income is received after the Act on Key Employees is no longer applied, the key employee’s income does not impact the tax rate of the other income earned during the year.

If the tax provisions of the Act on Key Employees has applied to the individual in question only during the early part of the year and they have also earned other income during the same period, and if the individual will stay in Finland for the rest of the year, the other income earned during the early part of the year will impact the progression of the income earned during the rest of the year. At the same time, the wage income earned during the early part of the year and taxed in accordance with the Act on Key Employees does not impact the progression of the earned income during the rest of the year.

A foreign resident coming to Finland for a stay of more than six months becomes a resident taxpayer in Finland on account of the duration of their stay. For this reason, wage earners falling under the scope of the Act on Key Employees will also receive a pre-completed tax return in the spring following the year during which they worked in Finland. Individuals who in addition to wage income taxed in accordance with the Act on Key Employees also had other earned income during the tax year, must also report the earned income subject to tax at source in their tax return (section 6(2) of the Act on Key Employees).

The earnings of key employees are taxed at source, which means that expenses incurred from the acquisition of income cannot be deducted from the wage income falling under the scope of the Act on Key Employees (natural deductions). Furthermore, expenses incurred from the acquisition of wage income referred to in the Act on Key Employees cannot be deducted from any other income earned by the key employee that is taxed in accordance with the Act on Assessment Procedure. However, deductions other than the expenses for the production of income (such as obligatory pension insurance contributions and interest on loans for the production of income) can be deducted from the income taxed in accordance with the Act on Assessment Procedure that the key employee has earned as a resident taxpayer. 

3.3 Absence of the prerequisites laid down in the Act on Key Employees

If the employer has withheld a key employee’s tax at source on the basis of the tax card even though the above prerequisites have not been met, the taxpayer is taxed in accordance with the general provisions on income taxation for the entire period of work (section 5 of the Act on Key Employees). However, the time limits regarding the adjustment of tax assessment are taken into account (section 56 of the Act on Assessment Procedure). In that case, the tax at source will be adjusted to the taxpayer’s benefit as withholding tax referred to in the Act on Tax Prepayments (1118/1996) or as tax at source referred to in the Tax at Source Act.

The Act on Key Employees applies to income that under the Income Tax Act is income earned in Finland. In the situation referred to in section 10(4) of the Income Tax Act, an individual can only be taxed as a key employee if they mainly work in Finland during the tax year.  There are no provisions in the Act on Key Employees under which the matter could have been judged differently because of the COVID-19 pandemic or other such factors. If the payer of the salaries continues to collect the key employee’s tax at source even if the employee in question mostly works outside Finland during the tax year, the taxation can be adjusted under section 5 of the Act on Key Employees in the manner described above.

If an individual becomes a non-resident taxpayer during the validity of the key employee’s tax card, the provisions of the Tax at Source Act will apply to them from the date on which their taxpayer status changed. In that case, no changes are made to the taxes paid by the individual in accordance with the Act on Key Employees during their resident taxpayer status if the prerequisites given in the Act on Key Employees have been met during this period. If an individual who has been granted a non-resident taxpayer status later returns to work in Finland, they do not have any right to be taxed as a key employee if they have been a resident taxpayer in Finland in a manner referred to in section 2(1)(4) of the Act on Key Employees at any time during the five years prior to starting work.

3.4 Cancelling key employee status

Applying for a key employee’s tax-at-source card is the taxpayer’s responsibility. An individual who has been granted a tax card under the Act on Key Employees may cancel their key employee taxpayer status by reporting their income for taxation under the Act on Assessment Procedure as follows:

• In the prepayment stage, by submitting a new application for an ordinary tax card under the Act on Assessment Procedure, or
• by reporting their income on a tax return before the end of the tax assessment procedure in the first tax year.

An individual can only be taxed as a key employee if they become a resident taxpayer in Finland when starting to work in accordance with the Act on Key Employees. Thus, you cannot request to be taxed in accordance with the Act on Key Employees from the tax year following the first tax year.

Based on the above, a taxpayer can no longer change the procedure that they have selected after the end of the first tax year. Thus, you can only cancel your key employee taxpayer status during the first tax year in the prepayment stage or before the end of the tax assessment procedure. In the following years, key employees are taxed in the same manner as in the first tax year. If the tax at source referred to in the Act on Key Employees has been collected from the taxpayer’s salary, the tax at source is credited to the taxpayer as withholding tax under the Act on Tax Prepayments if the taxation is carried out in accordance with the Act on Assessment Procedure.

3.5 Appeal procedure

If the application for a key employee’s tax-at-source card has been rejected in full or in part, the individual in question can appeal against the decision. For more information, please see the instructions Tax-at-source procedure applied to a non-resident taxpayer’s income and a key employee’s wage income.

3.6 Requesting a preliminary ruling

A taxpayer may request a preliminary ruling referred to in section 85 of the Act on Assessment Procedure or in section 45 of the Act on Tax Prepayments. A preliminary ruling referred to in section 45 of the Act on Tax Prepayments may be requested by the employer as well. For more information on how to request a preliminary ruling, please see the instructions Tax-at-source procedure applied to a non-resident taxpayer’s income and a key employee’s wage income and the guidance on requesting preliminary rulings (available in Finnish and Swedish, link to Finnish).

3.7 Refunding the tax at source of a key employee

A key employee can request the refund of excessively withheld tax at source from the Finnish Tax Administration. The requirement for the tax refund is that the party liable to withhold tax has not adjusted the tax overpayment (section 8 of the Act on Key Employees, and section 22 of the Act on Tax Prepayments).

The provisions on adjusting tax to the taxpayer’s benefit or detriment laid down in chapter 4 of the Act on Assessment Procedure are applied to the adjustment of decisions on refunding a key employee’s tax at source (section 8 of the Act on Key Employees, and section 22(4) of the Act on Tax Prepayments).

For more information on refunding the tax at source and on the appeal procedure regarding decisions on refunding the tax at source, see the instructions Tax-at-source procedure applied to a non-resident taxpayer’s income and a key employee’s wage income and guidance on appealing from a Tax Administration’s decision (available in Finnish and Swedish, link to Finnish).

3.8 Imposing tax at source

Obligations related to the withholding and payment of the tax at source on a key employee’s wage income concern the payor. The payor therefore has the primary responsibility to withhold the correct amount of tax at source (section 8 of the Act on Key Employees, and section 9(1) of the Act on Tax Prepayments). Uncollected tax at source on a key employee’s wage income can be imposed on the taxpayer, however, even if the tax was left uncollected due to the payor’s neglect (section 9 of the Act on Key Employees).

For more information on imposing the tax at source, see the instructions Tax at source procedure applied to a non-resident taxpayer’s income and a key employee’s wage income.