Taxation of key employees

This is an unofficial translation. The official instruction is drafted in Finnish (Avainhenkilöiden verotus, VH/6047/00.01.00/2021) and Swedish (Beskattning av nyckelpersoner, VH/6047/00.01.00/2021).

These instructions concern the taxation of individuals coming to work in Finland when the Act on Key Employees applies to the taxation of the individuals in question.

The instructions mostly correspond to what is stated in the instructions ‘Taxation of employees from other countries’ already issued by the Finnish Tax Administration. A number of additions have been made to the instructions and they concern such matters as the tax rate applied in Åland. The instructions now also contain information on situations in which an individual no longer meets the criteria set out in the Act on Key Employees and details how to file appeals and how to request a preliminary ruling.

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 nonresidency, see Finnish Tax Administration instructions Tax residency, nonresidency 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 of 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 EUR 5,800 per month for this employment for the entire period of their 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 EUR 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 he or she 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.

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 had 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(4a) 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(4c) 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 as a rule, 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.

Ruling no. 2943 of the Supreme Administrative Court of 11 November 2005

The Norwegian citizen A worked for many years for the British employer X in a Finnish shipyard in tasks related to the construction of a ship ordered by a foreign shipping company. By working in Finland, A had achieved the status of a resident taxpayer in Finland. The wages of A were paid on behalf of the employer X by a Finnish accounting firm operating in the location of the work, and the accounting firm managed the employer’s responsibilities arising from the wage payments (such as tax withholdings). Even though the employer X did not have a permanent establishment in Finland, employee A could be granted a tax at source card under the Tax at Source Act.

Tax year 2004
Sections 1 and 8 of the Tax at Source Act
Sections 9 and 10 of the Income Tax Act
Section 9 of the Act on Tax Prepayments

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 the tax card for the collection of the 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. The Act on Key Employees can only apply to the first 48 months of the work assignment. 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. The employer must pay its health insurance, pension insurance and other insurance contributions unless the foreign key employee presents an A1, E101 or similar certificate.

It is not always possible to collect the key employee’s tax at source at the time of the wage payment, and the tax must be imposed separately. Such situations may arise if the key employee has exercised employee stock options granted to them before arrival in Finland when the individual in question was still working for a foreign employer. If it has not been possible to collect the key employee’s tax at source at the time of the 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/4484/00.01.00/2021). 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. 

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 received wage income in accordance with the Act on Key Employees during the early part of the year and all other earned income was received when the Act on Key Employees no longer applied, the key employee’s income does not impact the tax rate on the other income earned during the year.

If the tax provisions of the Act on Key Employees only applied to the individual in question during the early part of the year and he or she also received other earned income during the same period and the individual in question 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 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 incurred from the acquisition of income (such as obligatory pension insurance contributions and interest on housing loans and 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 collected a key employee’s tax at source on the basis of the tax card even if the above prerequisites have not been met, the taxpayer is taxed in accordance with the general provisions applying to income taxation for whole duration of the employment (section 5 of the Act on Key Employees). 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 he or she mainly works in Finland during the tax year.  There are no provisions in the Act on Key Employees under which the matter could be judged differently because of such factors as the COVID-19 pandemic. 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 him or her from the date on which his or her 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 his or her resident taxpayer status if the prerequisites given in the Act on Key Employees have been met during this period. If an individual granted non-resident taxpayer status later returns to work in Finland, he or she does not have any right to be taxed as a key employee if he or she has 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 Appeal procedure and cancelling key employee status

Applying for a key employee’s tax at source card is the taxpayer’s responsibility. 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. To submit the appeal, the taxpayer must first request a separate decision from the Finnish Tax Administration that may be appealed against. This decision may be appealed against to the Assessment Adjustment Board under section 65a of the Act on Assessment Procedure. The Tax Recipients’ Legal Service Unit may also request an appealable decision from the Finnish Tax Administration if it wants to appeal against a decision on a tax card granted to a taxpayer.

An individual who has been granted a tax card under the Act on Key Employees may cancel his or her key employee taxpayer status by reporting his or her income in 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 his or her 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 he or she becomes 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 he or she had 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 Requesting a preliminary ruling

A taxpayer may request a preliminary ruling referred to in section 85 of the Act on Assessment Procedure on whether the Act on Key Employees should apply in his or her case in the situation described in the request. Even if the taxpayer had requested the preliminary ruling referred to in the Act on Assessment Procedure and the decision had gone in his or her favour, the taxpayer in question must nevertheless apply for a key employee’s tax at source card for his or her wage income. The taxation provisions of the Act on Key Employees can only be applied after a decision on the request concerning the application of the act has been issued, and an entry on this decision must be made in the tax card (section 4 of the Act on Key Employees).

A preliminary ruling may also be requested in a situation in which the taxpayer has already applied for and received a key employee’s tax card but the circumstances have changed to such extent that the Act on Key Employees may no longer be applicable. By requesting a preliminary ruling, the employer can check whether a tax at source can also be collected from the key employee’s salary in the future or whether a tax must be withheld from the salary in accordance with the Act on Tax Prepayments. A preliminary ruling referred to in section 45 of the Act on Tax Prepayments may be requested by the key employee or his or her employer.