Income taxation of foreign corporate entities

1 Introduction

This publication discusses income taxation of foreign corporate entities that have income derived from Finnish sources. The terms ‘foreign corporate entity’ and ‘foreign company’ refer to an entity not organized under the laws of Finland, and with another state than Finland as its trade-registered domicile.

• VAT registration of foreigners in Finland
• Prepayment registration and liability to income tax of foreign businesses

Other than tax-related guidance is available at www.prh.fi, the Trade Register, and www.ytj.fi, Business Information System, including administrative requirements as to how to set up a branch office in Finland. Furthermore, Ministry of Employment and the Economy has coordinated the https://www.suomi.fi/company site offering business services.

2 Taxing rights of Finland

Foreign companies have limited liability to tax in Finland. This means that they will usually be taxed only on the income sourced in Finland. For tax purposes, such income includes the income derived from a business or professional activity. Nevertheless, if a foreign company has a permanent establishment in Finland, it will be liable to tax on all the income attributable to the permanent establishment, also the income that has been received from the other state. National legal background of these tax rules is found in §§ 9,10 and 13a, Income Tax Act (TVL). 

If Finland has no tax treaty with the domicile state of the foreign company, Finland’s taxing rights will be determined by national tax rules (§§ 9 and 10, Income Tax Act). In a non-tax-treaty situation, Finland’s taxing rights are more substantial than in the situation where a tax treaty exists between the domicile state and Finland.

The majority of foreign countries having signed tax treaties — also known as double tax treaties or double tax conventions — this publication will describe the taxing rights that are valid when there is a tax treaty. 

3 Impact of tax treaties

Finland has concluded tax treaties with approximately 70 countries. The objectives of tax treaties are to reach mutual agreement between two sovereign states on how the taxing rights will be shared and divided, and on how double taxation can be eliminated, in international situations where the (corporate/individual) taxpayer receives income from the other state. 

Tax treaties can restrict Finland’s taxing rights, but they cannot amplify them. In this way, if there is a tax treaty, income tax cannot be levied simply by virtue of national tax rules unless it is also accepted under the provisions of the tax treaty. The tax treaties between Finland and other states are based on the Model Tax Convention of the Organisation for Economic Cooperation and Development, OECD. Consequently, the OECD Commentary of the Model Tax Treaty can be used for purposes of interpretation. 

Tax treaties usually include provisions on the taxation of business income saying that Finland can only tax the business income of the foreign company if a permanent establishment in Finland is in existence. In this way, Finland will have the right to tax all the income that the permanent establishment generates, including any other income types (as enumerated in the tax treaty). Examples of these are rental income, dividend income, interest income and royalty income, if they are connected with the business activities of the permanent establishment. However, even if they are not attributable to the permanent establishment, the applicable tax-treaty provisions, which govern taxable types of income, may permit Finland to tax other types of income than business income. Royalties from Finland may be within Finland’s taxing rights even if the company has no permanent establishment.

Income type categorization by tax-treaty provisions has no direct impact on the Finnish classification of sources of income, and similarly, no impact on the selection between various national tax rules, when the income is to be taxable in Finland. A tax treaty is capable of restricting the implementation of national legislation only if the latter would lead to tax assessment against the tax treaty.

The complete list of tax treaties in force see .

4 Permanent establishment for purposes of income tax

4.1 The General rule

The ´permanent establishment´ concept used in income tax finds its legal definition in § 13a of the Finnish Income Tax Act. Nevertheless, for practical purposes, the question of how to define ‘permanent establishment’ is usually answered by the relevant tax treaty. The reason for this is that if a tax treaty exists, its provisions must be followed, and they usually impose some restriction of national tax rules. The tax treaties between Finland and other states are usually based on the Model Tax Convention of the OECD, and Article 5 of this model defines the concept of permanent establishment. Nevertheless, some details may vary. 

For income tax purposes, permanent establishment, PE, is a place of business, in which the entire business or a part of the business of a corporation is being run. In this way, any place of business, a shop or another fixed retail outlet, an installation, a production plant etc. can constitute a permanent establishment. Typical places of business are, of course, the main office, a branch office, any other office, a factory, a workshop, and a mine or another site where the company makes use of natural resources. If management and business control are located in Finland, the company has a PE in Finland.

Nevertheless, a permanent establishment should be consistent, not temporary or short-lived in terms of its geographical location and in terms of time. The ´geographical location´ can simply be a stand at a market place. The ‘place of business’ may also be located inside the office of another company, if the foreign entity has the space at its use on a regular basis. 

The requirement ‘in terms of time´ is more loosely defined. It has only been stated that a temporary and short-lived business will not constitute a permanent establishment. If a non-temporary place of business is set up, it can become a PE even if it actually only operates for a short period due to the nature of business of the foreign entity, or due to premature closure. Example: If a foreign entity acquires a retail store facility and begins selling goods in the store, the tax authority will determine that the business had a PE as soon as it started, even though the store were to close prematurely for a special reason. 

A foreign entity may set up a temporary Finnish place of business with a definite objective to close it down quickly. However, if the place of business continues to operate, and it can no longer be considered a temporary place of business, it will be judged that the business had a PE as soon as it started. 

To have a PE, the foreign entity should use the establishment to fully or partly operate a trade or business. To operate a business usually requires some manpower. However, the presence of paid employees is not always necessary, because sometimes even a machine installation relying on automation has been considered a PE. 

Please note that for purposes of income taxation, the definition used in value-added taxation, VAT, is not the same with regard to a permanent establishment — also known as a fixed establishment. Consequently, a foreign company may simultaneously have a PE for purposes of VAT, but not have a PE for purposes of income taxation, and exceptionally, vice versa. For more information, see Publication 185e, VAT registration of foreigners in Finland. 

4.2 Construction, building and installation

A place where building, construction, assembly or installation work is being conducted will constitute a PE if it lasts longer than 6, 12 or 18 months, depending on the relevant tax treaty. Tax treaties have varying time limits, including the treaty between Finland and Estonia — a construction, assembly or installation job that lasts longer than 6 months will give rise to a PE.

The activities will be considered started when the preparatory work for the project begins in the target state. They will be considered ended when the project is finished, or at the final delivery of the object of construction. The main rule is that temporary interruptions of the project will not affect the application of the time limit discussed above. 

If a foreign corporate entity is in charge of several construction, assembly or installation jobs in Finland, each one of them should usually be viewed separately to answer the question whether the time limit is reached or not. However, if there is a strong connection between the separate projects or jobs, constituting commercial or geographical coherence, total length of time will determine the answer to the question. Similarly, if an artificial separation of the parts of one single job has been attempted, total length of time will determine the answer to the question.

When the total length of time is being calculated for the main building contractor, not only the main contractor´s but also the subcontractor´s operation time will be included. As far as the subcontractor is concerned, another PE will sometimes develop specifically for the subcontractor if the subcontractor’s own operation goes on past the time limit, or otherwise fulfills the requirements of the PE. 

4.3 Action of preparatory or auxiliary character

The presence of a foreign-held operation in Finland may only have to do with the maintenance of a stock of goods or merchandise belonging to the foreign business, and then it will not give rise to a PE. Similarly, if the only reason to maintain a place of business is to advertise, to collect information, to disseminate information, or to pursue scientific research, it will not give rise to a PE. Other examples of preparatory or auxiliary activities are an exhibition or showroom facility, and a place where merchandise is handed over to local customers. Nevertheless, to evaluate whether the Finland-based operation merely has a preparatory or auxiliary character, each case is reviewed separately.

Preparatory and auxiliary action makes a place of business a PE if it becomes obvious that it is exactly this activity that forms an essential part of the company´s business, or if this activity is being offered for sale as a service to outsiders. Typically, it cannot be considered preparatory and auxiliary if the operation deals with after-sales services including warranty repair and deliveries of spare parts to the foreign entity’s local customers. 

4.4 Brokers, agents, other intermediaries or representatives

Foreign entities may have a PE in Finland by virtue of a representative even if no place of business is made available. 

Specifically, a nonindependent person who is a broker, representative, agent etc. may cause the foreign company to have a PE, if he or she is authorized to enter into contracts and to receive and fulfill orders. Additionally, the authority to enter into contracts should be exercised several times at regular intervals, not just once. The nonindependent broker, representative or agent may be an individual physical person or a legal person. However, no PE will develop if the activities themselves do not give rise to it, in other words, if no permanent establishment would have developed in the theoretical situation that the company itself would have performed the same operations that the nonindependent person performed.

Furthermore, no PE will develop if the foreign company conducts business in Finland through a person who is a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business as a broker, representative or agent etc. The person will be considered independent as long as he or she is both legally and economically independent from the foreign company. 

4.5 Operation of ships or aircraft in international traffic

Many tax treaties prescribe that income derived from the operation of ships or aircraft in international traffic will be exempt from tax in the other Contracting State. This income is taxable only in the country where company management is located. Consequently, companies that operate ships or aircraft are in an exceptional situation, and Finland will not have taxing rights with regard to the income of a PE, even if an office had been set up in Finland. 

5 Income attributable to the PE

5.1 Obligation to keep accounting records

The foreign entity has the obligation to make full and complete accounting of the business transactions of the PE. The applicable provisions governing the organization of the accounting system are found in the Finnish Accounting Act.

The accounting materials should formally be retained and kept safe in a place located in Finland. However, the rules permit foreign entities to temporarily bring the materials to another location to finish the accounting work, to close the books, to draw up the balance sheet or to write a report of the Board of Directors describing the year’s operations. Electronically saved accounting vouchers and other accounting materials may be stored in a place located in another EU member state, if there is an online access and retrieval system (§ 2:9, Accounting Act).

Statutory audit in Finland of a Finnish PE should be arranged, if the foreign company´s annual accounts are not being compiled, audited and made public in the manner corresponding to the current EU rules (§ 1:1, Auditing Act). In practice, this obligation to arrange for audit in Finland mostly concerns the branch offices of foreign non-EU and non-EEA corporations, because the accounting laws applicable to them do not correspond to the current EU rules. In addition, special rules apply to the audit arrangements of the Finnish branches of foreign credit institutions, financial institutions and insurance companies. 

5.2 Arm’s length principle in income taxation

When a PE of a foreign entity exists, Finnish tax authorities have the right to impose income tax on its income. The principle called arm’s length principle is applied to answer the question as to what income should be attributable to the PE. Thus, income attributable to the PE under the arm´s length principle will include the income and profits, which would have accrued to it if it were an independent company, operating a similar trade or business in similar circumstances.

Transactions between the PE and other departments, subsidiaries or units of the foreign corporate entity are bound to take place (transactions with the parent company or with an establishment in another country). The arm’s length principle is applicable to the accounting of these transactions. If adherence to the arm’s length principle has failed, and consequently the taxable profits of the PE are smaller, or the tax-deductible losses of the PE are greater, the Finnish Act governing tax assessment procedure (§ 31) and the tax-treaty provisions governing the definition of business income (Article 7 of OECD Model Tax Convention) require adjustment of the taxable income. This is known as a transfer pricing readjustment. As a result, the taxable income and taxes of the PE will be increased — or losses decreased — by the readjustment amount that would have accrued to the PE if the pricing of each transaction had corresponded to the arm’s length principle. Prices should be similar to market prices, i.e. those between a buyer and a seller who are not associated with one another.

5.3 Accounted revenue and expenses; taxable profits

The corporate income tax rate is applicable to a foreign entity and to a PE. Methods of accounting and applicable rules of tax deduction are the same as the rules that concern domestic Finnish companies. Act on the Taxation of Business Profits and Income from Professional Activity (EVL, 360/1968) governs the methodology of business accounting and taxation.

As a result, the income attributable to the PE will include all the income that its business operation generates. Consequently, even income in the form of dividend, interest and royalties and capital gains for the sale of assets are included in PE income. On the other hand, all costs and expenses attributable to the PE and its business will be tax deductible. Examples of deductible amounts are depreciation of assets as computed under Act on the Taxation of Business Profits and Income from Professional Activity (EVL, 360/1968), wages and balance-sheet reserves. Furthermore, costs of management and administration of the PE are deductible.

However, no tax deduction is usually granted for interest or royalties paid out by the PE to itself (to the parent entity of the PE), because they are not regarded as amounts actually paid to an external business partner under the arm’s length principle. 

5.4 Income derived from partnership or consortium

The court has held (KHO 2002:34) in a ruling of Finland’s Supreme Administrative Court, KHO, that the business of the entire partnership should be the basis for determining the type of income accruing to a partner. Consequently, if a nonresident foreign party is a partner in a Finnish limited partnership, which operates a trade or business in Finland, any distributed portion of its income should be viewed as business income in the hands of the nonresident foreign partner.

The income of a foreign entity as a partner in a Finnish partnership/consortium is reportable in an income tax return in the same way as any other business income.

If there is a Finnish limited partnership only operating a venture-capital investment business, and a foreign entity is its silent partner, income derived from this partnership will only be taxable to the extent that equals the proportion that would be taxable if the income were directly generated to the partner from a Finnish source. The precondition for taxation in this manner is that the nonresident partner’s — the foreign entity’s — country of residence has a tax treaty with Finland (§ 9.5 Income Tax Act).

5.5 Business losses attributable to the PE

If the business operation of a PE results in losses, they will be deductible during the ten subsequent tax years, with the same loss-carryforward rules as are in effect for Finnish business entities. This means that the tax rules governing treatment of losses, set out in Income Tax Act, are equally applicable to PEs. Correspondingly, if more than half of the foreign company´s stock has changed hands, it will cancel the right to the carryforward of PE losses. New owners cannot have the same deduction as original owners. A special permission from the tax authority is required to facilitate carryforward. Similarly, a special permission is needed if more than half of the stock of a company owning more than 20% of the foreign parent company stock changes hands. However, if the foreign entity is a stock-exchange listed company, it is entitled to carry forward the losses without the necessity to ask for the special permission (§ 122, Income Tax Act). 

6 Assessment procedure, tax control, and consequences of taxpayer’s non-compliance

6.1 Income tax return

If a PE exists, the foreign company should file an income tax return showing revenues, expenses, assets and liabilities. The foreign company is expected to pay corporate income tax on any P/L profit (26% for several recent years including the 2009 and 2010 taxable years). The tax authority in charge of the assessment of the PE will officially confirm the economic result, after analysis of the income tax return and its enclosures.

Foreign and domestic companies alike have the same deadlines for filing tax return. The deadline is four months after the close of the financial year. The foreign parent´s financial year will determine the financial year of the PE for tax purposes. It is important to submit the information regarding period length, i.e. the beginning and end dates of the financial year (also known as ‘accounting period’) to the tax office, preferably in conjunction with the first registration. If any changes of the end date take place, you will be expected to notify the tax office.

The foreign company should deliver the income tax return to the Tax Administration. If necessary, the foreign company can deliver the return to a diplomatic representation of Finland, which will then immediately forward it to the local Finnish unit of the Tax Administration.

Foreign and domestic companies alike fill out the same income tax return forms, as appropriate, published by the Tax Administration. The income tax return form is 3052e, 6B Tax return of business activities / Corporation. Its mandatory enclosure is form 3050e, 62 Itemization of reserves, revaluations and depreciation.

Foreign-held permanent establishments are expected to enclose a profit/loss account and balance sheet with the income tax return form. These financial statements should be drawn up consistently with the provisions of the Finnish Accounting Act. Assets and liabilities are also to be reported. Depending on the specific circumstances and the nature of documentation, please also enclose a Finnish or Swedish translation, made by an official translator or another qualified person, when enclosing documents in foreign languages with the income tax return. 

You can use the e-filing services to send the form to the Tax Administration. For more information on online services, visit yritys.tunnistus.fi. If you use a paper-printed income tax return form, it should be authorized with the signature of a person who has the right to sign the company name, and it should show the name, address and details of the fiscal representative/contact person in Finland. 

For more information on this obligation and on the information-reporting requirements, read the instructions on filling out the income tax return forms, which are published and updated every year. Forms and instructions are enclosed with the annual mailings to corporate taxpayers. 

6.2 Sanctions for negligence; description of tax control

Foreign and domestic corporate entities alike are subject to tax control, constantly exercised by the Finnish Tax Administration. Control consists of assessment procedure, tax examinations and audits, guidance and directions given to taxpayers and the monitoring of regular submittal of tax returns, and the monitoring of incoming payments. Similarly, the ongoing exchange of information between Finnish and foreign tax authorities is a part of tax control. It is based on international conventions and mutual cooperation with many foreign authorities.

The tax authority may debit surtax or similar penalty payments of a foreign entity if the obligation to submit information and tax returns is not respected. 

If it has been regarded that the Finnish operation of a foreign entity is a PE, and the foreign entity fails to file a tax return, or files an incorrect tax return that cannot be used in tax assessment, even if corrections were made, the law requires the tax authority to perform an estimated assessment. The procedure of estimation of a taxpayer’s taxable income also involves the addition of surtax. If a situation of gross negligence is ascertained, separate legal rules of the Penal Code will take over, and the authorities will deal with the problem as a tax crime.  

7 Income tax if no PE is in existence

This chapter will discuss the most frequently occurring income types of a foreign entity, which may be taxable in Finland even in situations where the foreign corporate entity has no PE in Finland.

7.1 Income derived from real property and residential units

National tax rules provide that Finland has the taxing rights on income derived from real property and housing-company flats/apartments if they are located in Finnish territory. By extension, income types including capital gains and rental income are taxable, even if the foreign entity has no PE (§ 10, Income Tax Act). The existing tax treaties usually impose no restriction of Finland’s taxing rights in this regard, because tax-treaty provisions are generally based on the idea that real property should be taxable in the country of its location. Technically, shares in a Finnish housing company are not considered real property. However, Finland’s tax treaties include references to housing-company flats/apartments. Nevertheless, the tax treaty with Spain does not have this reference, and consequently, Finland cannot impose taxes on rental income in the hands of a Spanish resident, even if the rented flat/apartment is located in Finland. 

National tax rules are decisive when the source of income is determined, if income is derived from real property or units of a housing company. If a foreign entity has this type of income, it is expected to declare it, without prompting on the tax authorities’ part. Matters associated with assessment procedure and dealing with any non-compliant behaviour are subject to the same rules as where the foreign entity has a PE (for more information, see chapter 6 above).

Starting 1 January 2010, income tax return information should also cover any income derived from woodlands and forestry. Previously, a source-based system of tax assessment of forestry income was in use. This has involved the obligation of all buyers of timber to collect tax at source when they are acting as payors.

7.2 Dividends, interests and royalties

For precise information on nonresidents’ receipts of dividends, interests and royalties, see Publication 280e. The payor is expected to collect tax at source at rates defined in the tax treaties with most countries. 

Receipts of interest in Finland is not taxable income to a foreign entity, if the reason for interest payment is a balance of commercial accounts receivable / accounts payable, or a bank deposit, a government bond, debenture, other similar instrument or a loan from a foreign country to a Finnish operation, unless the Finnish party should view it as an investment in its equity, similar to payment of share capital. Furthermore, to be exempt from income tax, receipts of interest should not be attributable to the business of a PE (§ 9.2, Income Tax Act). 

7.3 Passive investment and moveable property

Of itself, investment of the passive type in Finland will not give rise to a PE. Likewise, the income derived from it will not be taxable in Finland as business income. However, Finland may have taxing rights on the income if it is classified as another income type, e.g. royalties, dividends, interests or income derived from real property. For this reason, each case will be decided separately and for more information on the probable tax treatment, foreign investor-taxpayers should consult the tax treaty with the residence country of the foreign entity concerned. 

Capital gains received for sales of shares and other securities are usually not taxable in Finland. However, unless the relevant tax treaty prevents Finnish taxation of income, if one or several Finnish-located real property units form more than 50% of the assets of a housing company, any other joint-stock company, or cooperative society, capital gains will be taxable in conjunction with a sale of shares in such an entity, or with a sale of real property (§ 10.10, Income Tax Act). 

For information on income derived from a partnership, see section 5.4 above.

8 Elimination of double taxation

If a foreign entity generates income in Finland it may be subject to taxation not only in Finland but also in the country of residence. To eliminate double taxation, the usual procedure is to lighten the tax burden at the country of residence. This is done either as the rules derived from the tax treaty provide, or under the national tax rules of the country. For this reason, to gain more information on the probable tax treatment, foreign taxpayers should consult the tax treaty with the residence country. The residence country can either credit the Finnish tax or proclaim the Finnish-sourced income as tax-exempt.

9 Fiscal liability for Finnish taxes payable

9.1 Name of representative to be entered in Trade Register

To have a foreign entity appoint a representative, the national legal background is found in Act on the Right to Carry on a Trade (elinkeinolaki). The Trade Register requires that a Start-Up form be submitted if a foreign entity opens a Finnish branch office or other comparable place of business. There should be a representative with the right to receive official communications including subpoenas on behalf of the foreign entity. The representative’s name and contact information should be entered in Trade Register.

If a foreign business or another corporate entity (a foundation) has been organized under the laws of an EU/EEA country, and it has its headquarters, tax domicile or head office in an EU/EEA country, the appointed representative may be domiciled in an EU/EEA country. However, if the above requirements are not met, the appointed representative should live and be domiciled in Finland.

For more information on how to appoint a representative, go to the Trade Register website www.prh.fi or to the Business Information website www.ytj.fi.

9.2 Representative’s responsibility for tax payments

Pursuant to § 52, Act on Assessment Procedure, the representative of a foreign entity may be liable for the levied income taxes. This liability concerns the taxes that are payable by individuals resident outside the EU/EEA, or payable by corpo-rate taxpayers resident outside the EU/EEA. Consequently, the representative’s responsibility for tax payments does not concern taxes payable by foreign entities resident in an EU/EEA country.

If a foreign non-EU/EEA resident entity has a branch in Finland, the person liable for the tax levied will be the appointed representative. If a foreign credit institution has a branch office in Finland, the person liable for the tax levied on the credit institution will be the director of the branch.

9.3 Limitations of responsibility 

The representative’s responsibility has been defined in a restrictive manner so as to only concern the appointed representative, whose name is entered in Trade Register records, as provided in Act on the Right to Carry on a Trade (elinkeinolaki). Consequently, such a representative will carry no responsibility for a tax that has been levied during a period when the representative did not act as the representative of the foreign-held establishment in question (see ruling KHO 2006:57).

10 Closing down the PE

The foreign entity may close down the PE located in Finland, and its assets may be sold or transferred back to the country of residence. The closure operations of the PE’s business have an impact on the taxation for the last tax year of the PE. 

If the PE goes out of business and its assets are sold or transferred, the fair market value of the assets will be added to the income of the PE for the last tax year. This procedure is no different from the domestic procedure in conjunction with the liquidation of a domestic corporate entity. Additionally, if the PE had any reserves in the balance sheet, closing down its business will mean that the reserve amounts will be added to the income of the PE for the last tax year (§ 51 e, Act on the Taxation of Business Profits and Income from Professional Activity).

As an alternative, the PE can be converted into an independent company. It allows the foreign entity to obtain the tax benefits associated with controlled conversion of the legal form of a business operation, as provided in Act on the Taxation of Business Profits and Income from Professional Activity. The conversion will be based on continuity, and the tax authorities will not treat it as liquidation. This procedure can only be implemented in situations where the foreign entity is a tax resident of another EU member state (§ 52d-e, Act on the Taxation of Business Profits and Income from Professional Activity).

Instructions published in Finnish or Swedish have legal force. Click this link to see Ulkomaisen yhteisön tuloverotus Suomessa (dnro 129/37/2010, 18.2.2010).