Taxation of students and trainees in international situations

This instruction contains information about the tax treatment of the income earned by students and trainees coming to Finland and those going abroad in individual taxation and tax prepayment. The instruction also contains information about the impacts of tax treaties on taxation and about the elimination of double taxation. The instruction has been updated based on changes made to tax treaties.

1 Introduction

The taxation of students and trainees coming to Finland and those going abroad often depends on the tax treaties that Finland has concluded with other countries. In most cases, the country in which the student or trainee is staying on a temporary basis may not tax their foreign-sourced income. At the same time, however, the country in which the individual is staying has, as a rule, the right to tax the income earned from work performed in that country. Some of the tax treaties contain provisions under which this income too is fully or partially tax-exempt in the country in which the individual in question is staying.

This instruction briefly covers the concepts of tax residency and tax non-residency, the impact of tax treaties on the taxation of students and trainees and the impacts of national legislation on the taxation of students and trainees coming to Finland and those going abroad.

2 Tax residency and tax non-residency

2.1 Tax residency

Under section 9(1)(1) of the Income Tax Act (1535/1992), natural persons living in Finland are also tax residents of Finland. Living in Finland is separately defined in the Income Tax Act. Under section 11(1) of the Income Tax Act, an individual is considered to live in Finland if they have their permanent dwelling and home in Finland. An individual who stays in Finland for a continuous period of more than six months is also a tax resident of Finland.

A Finnish citizen moving abroad will, as a rule, remain a tax resident of Finland for the year of relocation and for the three following years. In most cases, foreign citizens and stateless persons cease to be Finnish tax residents on the day on which they leave Finland. For more information, see the instruction Yleinen ja rajoitettu verovelvollisuus (in Finnish and Swedish).

The general provisions referred to above also apply to students and trainees. The reason for coming to Finland is not the factor determining an individual's tax residency status. A student or a trainee is a Finnish tax resident if they have their permanent dwelling and home in Finland or stay in Finland for a continuous period of more than six months.

A Finnish tax resident is liable to pay tax on Finnish-sourced and foreign-sourced income (section 9(1)(1) of the Income Tax Act). Finnish tax residents must usually also pay taxes on their foreign-sourced income in Finland even if they had already paid taxes on them in the country of source. There are, however, exceptions to this rule in Finland's national legislation. For example, the income from work earned abroad may be tax-exempt in Finland if the prerequisites for the six-month rule are met (section 77 of the Income Tax Act). Tax treaties may also restrict Finland's right of taxation under its national legislation.

2.2 Tax non-residency

An individual who has not lived in Finland during the tax year, is a tax non-resident in Finland (section 9(1)(2) of the Income Tax Act). In this context, "living in Finland" is defined in the same manner as in section 11(1) of the Income Tax Act referred to above. Foreign citizens living outside Finland are considered tax non-residents in Finland. Foreign citizens living outside Finland will remain tax non-residents if they stay here for a maximum of six months.

In addition, Finnish citizens that have moved to a foreign country are considered as tax non-residents if three years have elapsed since the year when the move took place. Before three years Finnish citizens can be regarded as tax non-residents if they have shown explicit evidence that they no longer have any close ties connecting them with Finland. For more information, see the instruction Yleinen ja rajoitettu verovelvollisuus (in Finnish and Swedish).

As a rule, students and trainees coming to Finland are tax non-residents in Finland if they can be considered residents of a foreign country and they intend to stay in Finland for a maximum of six months.

Provisions on the taxation of non-residents are contained in the Act on Taxation of Non-Residents' Income and Capital (627/1978), which is also known as the Tax at Source Act. Tax non-residents are only liable to pay tax in Finland on Finnish-sourced income (section 9(1)(2) of the Income Tax Act). The types of Finnish-sourced income are listed in section 10 of the Income Tax Act. However, the list is not exhaustive as it does not include such income as grants and scholarships. Under section 10 of the Income Tax Act, earned income received from a Finnish public sector body or other salary from work that has mainly been performed in Finland for a Finnish-based employer is considered Finnish-sourced income. Tax treaties may, however, restrict Finland's right of taxation in this respect.

2.3 Three-year rule

Under the Income Tax Act, a Finnish citizen moving abroad is usually considered to be a resident of Finland in the year of the move and for the following three years. However, the individual in question may be considered a tax non-resident before the end of the third year if they are able to show that they have not maintained close ties with Finland after the move to the foreign country (section 11(1) of the Income Tax Act). For more information about the three-year rule and the definition of the close ties, see the instruction Yleinen ja rajoitettu verovelvollisuus (in Finnish and Swedish).

The main requirement for the breaking of the close ties is that the individual in question is permanently leaving Finland. A Finnish citizen moving to a foreign country on a temporary basis still has close ties with Finland even if they no longer had their permanent dwelling or home in Finland. An individual is considered to have close ties with Finland if they are only staying in a foreign country for the purpose of studying.

The close ties with Finland may be ceased if the reason for staying in a foreign country changes on account of family ties, personal relations or work and as a result the stay in the foreign country is no longer exclusively for the purpose of studying. Moreover, the other close ties, such as being covered by the Finnish social security, must also be ceased. In taxation practice, being covered by the Finnish social security has been considered a close tie with Finland.

3 Tax treaties

3.1 General information about the student article in the tax treaties

Many of the tax treaties between Finland and other countries contain provisions on the taxation of students and trainees going abroad and those coming to Finland. Finland has an income taxation treaty with more than 70 countries (Valid tax treaties). Under the tax treaties, the countries concerned have agreed on the sharing of the right of taxation and the elimination of double taxation in situations where a natural or legal person living in the other country receives income from the other country.

Nearly all tax treaties between Finland and other countries have an article containing provisions on students and trainees that restrict the taxation right of the country of temporary residence (country of study). This means that in most cases, the country of study may not tax students' and trainees' foreign-sourced income. At the same time, however, the country of study has, as a rule, the right to tax the income earned from work performed in the country of study. Some of the tax treaties contain provisions under which this income too is fully or partially tax-exempt.

The student tax relief provisions of the tax treaties only apply to students and trainees that are living or have, immediately before coming to the country of study, lived in the other country in the manner referred to in the treaty.

The student tax relief also applies to trainees. For the purposes of the student tax relief, a trainee is for example an individual who is in vocational education in their own country that includes acquisition of practical experience by working, such as apprenticeship training.

3.2 Income earned outside the country of study

As a rule, the country of study may not tax the foreign-sourced income earned by the student or trainee. Most of the tax treaties contain an article under which the payments received by a student or a trainee for livelihood, education or practical training is not taxed in the country of study if the money comes from sources outside the country of study. For example the grants and study allowances received by students from their countries of residence may not be taxed in the country of study.

Most of the tax treaties between Finland and other countries are based on the Model Tax Convention of the OECD. The Model Tax Convention contains an article applying to students and trainees. Under Article 20 of the Model Tax Convention

"Payments which a student or business apprentice who is or was immediately before visiting a Contracting State a resident of the other Contracting State and who is present in the first-mentioned State solely for the purpose of his education or training
receives for the purpose of his maintenance, education or training shall not be taxed in that State, provided that such payments arise from sources outside that State."

A student tax relief provision that is identical with or corresponds to the Article 20 of the Model Tax Convention is contained in the tax treaties between Finland and the following countries:

Argentina, Armenia, Australia, Austria, Azerbaijan, Barbados, Belarus, Belgium, Bermuda, Bosnia and Herzegovina (treaty with Yugoslavia), Brazil, the British Virgin Islands, Bulgaria, Canada, Cayman Islands, China, Croatia (treaty with Yugoslavia), Cyprus (from 1 January 2014), Czech Republic, Egypt, Estonia, France, Georgia, Germany, Greece, Guernsey, Hong Kong (from 1 January 2019), Hungary, India, Indonesia, Ireland, Isle of Man, Israel, Italy, Japan, Jersey, Kazakhstan, Kosovo (treaty with Yugoslavia), Kyrgyzstan, , Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Moldova, Montenegro (treaty with Yugoslavia), Morocco (from 1 January 2013), Netherlands, New Zealand, Nordic countries, Pakistan, Philippines, Poland, Portugal (until 31 December 2018), Republic of Korea, Romania, Russia, Serbia (treaty with Yugoslavia), Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Switzerland, Tajikistan (from 1 January 2014), Tanzania, Thailand, Turkey, Turkmenistan (from 1 January 2018), Ukraine, United Arab Emirates, United Kingdom, United States of America, Uruguay (from 1 January 2014), Uzbekistan, Vietnam and Zambia.

The wording of the student article is not always identical with that of the Model Tax Convention. In addition to business apprentices, the provision may also apply to such groups as trainees in industrial firms, agriculture and forestry. It is advisable to check the content of the student article from the tax treaty in effect.

In addition to the student tax relief applying to the income earned outside the country of study, some of the tax treaties also contain a tax relief provision on income earned in the country of study.

3.3 Income earned from work performed in the country of study

The country of study usually has the right to tax the income earned by a student or trainee from work performed in that particular country. The student tax relief usually only applies to income earned outside the country of study. In such cases, the right to tax the income earned from work performed in the country of study is on the basis of the article on private or public employment relationships contained in the tax treaty.

Some of the tax treaties contain provisions under which the right of the country of study to tax the income is restricted so that the income from work performed in the country of study is also fully or partially tax-exempt.

The tax relief concerning the income from work performed in the country of study only applies if the student is studying in a university or other higher education institution in their country of residence. A higher education institution corresponds to Finnish universities and universities of applied sciences. As the provision usually also applies to trainees, it also covers other education taking place in the country of residence if this also includes periods of training aimed at providing the student with practical experience. In such cases, the work may be considered practical training referred to in the tax treaty.

The tax relief can only be applied to income earned from the work performed in the country of study if the stay and work in a foreign country is connected with the taxpayer's studies or practical training in their country of residence. The only exception is the tax treaty between Finland and France under which the work does not need to be connected with studies or practical training. The tax treaties between Finland and all other countries listed below require that the work is connected with studies or practical training. Presenting the study records provided by the education institution of the country of residence showing that the education institution considers the work as practical training has been deemed as sufficient evidence of the study-related nature of the work in the country of residence in judicial practice (KHO 19.6.1996 document 2063).

There are also different types of restriction concerning the duration of stay. Again, the tax treaty between Finland and France is an exception as it does not contain any restrictions concerning the duration of stay. The student tax relief may apply to the entire income, part of it or only to the amounts necessary for student's maintenance. If the exact amount of the relief is not mentioned in the tax treaty, the tax relief laid down in section 6(1) of the Tax at Source Act (510 euros/month or 17 euros/day) is applied in Finland.

For example, under the student article of the old tax treaty between Finland and Germany, applied until 31 December 2017, the income earned from the work performed in the country of study is fully tax-exempt if the student stays in the country of study for a maximum of 183 days each calendar year. In the new tax treaty applied as of 1 January 2018, the amount of the student relief equals the earnings required for living, and a student qualifies for the relief if their uninterrupted stay in the country of study does not exceed 183 days. This provision applies to students in universities and other higher education institutions, apprentices, and trainees in business, industries, agriculture or forestry. An additional requirement is that the work is connected with their studies or practical training.

Under the tax treaties between Finland and the following countries, the student tax relief is the amount necessary for student's maintenance (in Finland, 510 euros/month or 17 euros/day) provided that the stay in the country of study does not exceed 183 days/calendar year:

Belgium, Bosnia and Herzegovina (treaty with Yugoslavia), Bulgaria, Croatia (treaty with Yugoslavia), Greece, Hungary, Indonesia, Kosovo (treaty with Yugoslavia), Luxembourg, Montenegro (treaty with Yugoslavia), Serbia (treaty with Yugoslavia), Tanzania and Thailand.

Under the tax treaties between Finland and the following countries, the student tax relief is the amount necessary for student's maintenance (in Finland, 510 euros/month or 17 euros/day) provided that the stay in the country of study does not exceed 183 days (the number of days is not tied to the calendar year):

Argentina, Austria, Barbados, Brazil, Czech Republic, Georgia, Germany (from 1 January 2018), India, Israel, Netherlands, Pakistan, Romania, Russia, Sri Lanka (from 1 January 2019), Turkey, Ukraine, United Arab Emirates and Vietnam.

The tax treaties with the countries listed below also contain a student tax relief provision on income from work performed in the country of study. However, the prerequisites for and the amount of the relief differ substantially from the provisions in the other tax treaties listed in this section and they should always be checked from the tax treaty in effect at the time (Valid tax treaties).

Egypt, Faroe Islands, France, Iceland, Japan, Malaysia, Philippines, Portugal (until 31 December 2018), Republic of Korea, Sri Lanka (until 31 December 2018), United Kingdom and Zambia.

The tax treaty provisions applying to Faroe Islands and Iceland that differ from those applying to other Nordic countries are contained in section IX of the Protocol to the Nordic Tax Treaty.

3.4 Grants and scholarships received from the country of study

In some of the tax treaties, the provisions on the right to tax the grants and scholarships received from the country of study are contained in the student article (for example, in Article 21 of the tax treaty between Finland and the United Kingdom). If there are no references to the right to tax grants and scholarships in the student article, the right to tax the grants and scholarships received from the country of study is on the basis of the article on other income (usually Article 21 of the tax treaty).

Under the article on other income, the income is usually only taxed in the individual's country of residence stated in the tax treaty.

However, under the tax treaties between Finland and the following countries, the other income may also be taxed in the country of source in which case the double taxation is eliminated in the manner specified in each tax treaty:

Argentina, Australia, Azerbaijan, Barbados, Brazil, Canada, China, Estonia, India, Indonesia, Latvia, Lithuania, Malaysia, Mexico, Morocco, New Zealand, Pakistan, Philippines, Singapore, Thailand, Turkey, Uruguay, Vietnam and Zambia.

Under the tax treaty between Finland and Egypt, the other income is only taxed in the country of source.

Under the tax treaty between Finland and Portugal, the other income is only taxed in the country of source if it is not taxable in the individual's country of residence. The tax treaty with Portugal is applied until 31 December 2018.

3.5 Teaching and research staff

Some of the tax treaties also contain provisions on tax relief for teaching and research staff. The tax treaties that Finland has concluded with Egypt, France, Japan and Spain (until 31 December 2018) contain provisions under which both teaching and research staff are entitled to tax relief. The tax treaty between Finland and the United Kingdom only contains a provision on tax relief for teaching staff. The tax treaties with Morocco and the Republic of Korea contain a tax relief provision only for research staff. The tax relief means that under certain conditions, the salaries of teaching and research staff are tax-exempt in the country of work.

A new tax treaty has been concluded with Spain and is applied as of 1 January 2019. It does not contain a provision on tax relief for teaching or research staff.

The provisions of the tax treaties that apply to teaching and research staff differ from those applying to students and trainees. The difference between students and research staff is not always clear. In Finland, the student article applies to postgraduate students and researchers. At the same time, however, postgraduate students working on their doctoral dissertations are considered researchers in Finland, whereas in some other countries they are considered as students.

It is advisable to check the prerequisites for the tax relief from the tax treaty in effect at the time. For more information about the tax relief granted to teaching and research staff, see the instruction Taxation of employees from other countries.

4 Taxation of students coming to Finland

4.1 General

The taxation of the salary of a student or trainee coming to Finland substantially depends on whether the individual in question is considered a tax resident or a tax non-resident. In many cases, the nationality of the employer (Finnish or foreign) is also relevant. A tax resident is liable to pay tax on their worldwide income. A tax non-resident is only liable to pay taxes on income earned in Finland. Income earned in Finland includes the income listed in section 10 of the Income Tax Act.

However, salary is not considered income earned in Finland and it is not taxed in Finland if the tax non-resident works in Finland for a foreign employer (section 10(1)(4) of the Income Tax Act). A foreign employer is an employer with no permanent establishment in Finland.

A tax resident is taxed in the manner laid down in the Act on Assessment Procedure (1558/1995). A tax non-resident may also be taxed progressively in the manner laid down in the Act on Assessment Procedure. In such cases, a tax non-resident must obtain a tax non-resident's tax card from the Finnish Tax Administration for the payer of the salary or append an application for progressive taxation to the tax return.

In the taxation carried out in accordance with the Act on Assessment Procedure, a student or trainee may be granted the tax relief that they are entitled to under a tax treaty. The relief amounts to 510 euros/month or 17 euros/day unless otherwise provided in the tax treaty.

In most cases, the worldwide income earned by a student or trainee coming to Finland is taxed by their country of residence in accordance with its own legislation. Thus, the income earned in Finland by a student or trainee that has come to Finland may also be taxed in the student's or trainee's country of residence. However, the country of residence eliminates double taxation in accordance with the tax treaty.

The only difference between the taxation of students and trainees coming to Finland and employees coming to Finland is that a student or trainee may be entitled to the tax relief based on a tax treaty as described in section 3.3 above.

The income earned by a tax non-resident student or trainee from work performed for a Finnish employer is taxed in accordance with the Tax at Source Act.

4.2 Tax-at-source deduction

A student or trainee arriving in Finland for a stay of no longer than six months is considered a tax non-resident in Finland. If a tax non-resident does not apply for a non-resident's tax card, the payer of the salary must withhold the tax at source from the salary in connection with the payment. The tax at source is a final tax and amounts to 35 per cent of the salary. Fringe benefits are also subject to tax at source, as valued in accordance with a decision of the Finnish Tax Administration (sections 3(1) and 7(1) of the Tax at Source Act).

Before withholding the tax, the payer may make a tax-at-source deduction from the total amount of the salary and the fringe benefits if there is an appropriate entry on the tax card. Provisions on the tax-at-source deduction are contained in section 6 of the Tax at Source Act. The deduction amounts to 510 euros/month or 17 euros/day if the salary accumulates for a period of less than one month. The tax-at-source deduction also covers the student tax relief. Any employer's health insurance contribution and the health insurance contribution payable by the insured are paid from the amount from which the tax-at-source deduction has not yet been made.

4.3 Progressive taxation

Nonresident individuals can claim treatment of their earned income under the progressive scheme instead of source taxation. When the progressive scheme is granted, the tax rules are the same as for Finnish residents living in Finland on a permanent basis.

Progressive taxation is usually a more favourable alternative for students and trainees than taxation at source. However, a student or trainee is not entitled to the tax-at-source deduction if the taxation is carried out in accordance with the Act on Assessment Procedure. However, a student or trainee may be entitled to student tax relief based on a tax treaty in the same manner as tax residents. The tax relief amounts to 510 euros/month or 17 euros/day unless otherwise provided in the tax treaty.

For more information about the progressive taxation of tax non-residents, see the instruction Taxation of employees from other countries under 2.4 Tax assessment of nonresidents under the progressive scheme.

5 Taxation of Finnish students going abroad

5.1 General

As a rule, the taxation of the income earned abroad by Finnish students and trainees is determined in accordance with provisions normally applied to salaries. As described in section 3.3 above, a number of tax treaties contain provisions under which students and trainees are entitled to tax relief. The income earned in the country of study may be fully or partially tax-exempt in the country of study. However, students or trainees living in Finland may still be taxed in Finland.

When a Finnish tax resident is working outside Finland, the income earned from this work is taxable in Finland under our national legislation (section 9(1)(1) of the Income Tax Act), unless there are specific provisions making it tax-exempt. The income may also be taxed in the country of study in accordance with that country's legislation. If the work-related stay in a foreign country lasts at least six months, the salary received from that work may be tax-exempt in Finland under the six-month rule.

If the six-month rule cannot be applied to the salary received abroad, it must be determined whether the country of study has the right to tax the salary under a tax treaty. Double taxation is eliminated in Finland if the country of study has the right to tax the income. The income is only taxed in Finland if the country of study does not have the right of taxation under a tax treaty.

5.2 Elimination of double taxation

As a rule, the income earned by tax residents from work outside Finland is taxable in Finland. The income may also be taxed in the country of study in accordance with that country's legislation. If the individual in question is working in a country that has a tax treaty with Finland, Finland must eliminate double taxation if Finland is the country of residence under the tax treaty and the country of study has the right to tax the income under the tax treaty. Double taxation may also be eliminated when an individual is working in a country that does not have a tax treaty with Finland.

If Finland has a tax treaty with the country of study, double taxation is eliminated by means of the credit or exemption method. There are no definitions in the tax treaties on what calculation formulas should be used as more detailed provisions on them are contained in the national legislation of the countries concerned.

In Finland, provisions on the elimination of international double taxation are contained in the Act on the Elimination of International Double Taxation (1552/1995). The act is also applied when there is no tax treaty between Finland and the country of study. In such cases, double taxation is always eliminated by means of the credit method.

The act is applied to the income taxes collected by the State of Finland, corporate income taxes, municipal income taxes and church taxes. The tax treaties contain provisions on which taxes are considered in the elimination of double taxation. For example, under the tax treaty between Finland and the United States, the taxes paid to the individual states of the United States are not credited in Finland. If there is no tax treaty, only the tax payable to the foreign country may be considered under the act. The act and the tax treaties do not apply to health insurance contributions.

Under the act, double taxation is eliminated by deducting the taxes paid in the foreign country from the tax payable on the same income in Finland (credit method). Under the tax treaties, double taxation is eliminated by means of the credit or exemption method. In the latter method, the income is tax-exempt in Finland. However this may mean higher progressive tax in Finland.

The taxpayer must request the elimination of double taxation and determine the taxes paid to the other country and the basis for them. The taxpayer may already request the elimination of double taxation in tax prepayment or on the tax return form.

For more information about the elimination of double taxation, see chapter 4.4 ("Elimination of double taxation") in the publication "Kansainvälisen verotuksen käsikirja" (Handbook of international taxation). The publication is only available in Finnish.

5.3 Six-month rule

Income earned from work outside Finland is tax-exempt in Finland (section 77 of the Income Tax Act)

• if the stay in a foreign country arises from that work and
• lasts for a continuous period of at least six months and
• the country of work has, under a tax treaty, the right to tax the income in question if there is an income tax treaty between Finland and the country of work.

The provision only applies to salaries, which means that social benefits, non-wage compensations and royalty-type payments are not considered tax-exempt income under this provision. The tax exemption does not apply to salaries paid by a Finnish public sector body, Business Finland Oy or work performed in a Finnish aircraft or vessel.

The six-month rule can only be applied if the stay outside Finland arises from work. The six-month rule may be applied to a student, if the student works in the country of study continuously and on a regular basis for at least six months.

Another prerequisite is that the country of work has the right to tax the income. Some of the tax treaties contain provisions that restrict the right of the country of study to tax the income of students and trainees. These tax relief arrangements are detailed in section 3.3 above. As regards postgraduate students, it should also be noted that not all countries define researchers and students in the same manner. For example, the country of study may consider a Finnish researcher a student and vice versa. The interpretation of the country of study is decisive in this matter.

6 Social security contributions and guidance on procedures

For information about social security contributions and guidance on procedures, see the instructions Taxation of income earned abroad and Taxation of employees from other countries.