Effects of the Coronavirus pandemic on taxes on income received under an employment contract in a foreign country (the six-month rule and forces majeures)

Background

In spring 2020, Finland’s Ministry for Foreign Affairs recommended that everyone should refrain from all kinds of trips. This warning was given in reference to the information issued by the World Health Organization, indicating that the coronavirus is a pandemic. Many countries imposed restrictions on travel or introduced limitations for travellers to enter the country. Some countries closed their airspace completely or imposed flight restrictions.

The Tax Administration has noted in its previous statement on the coronavirus that the pandemic is deemed as a “force majeure”, an unexpected and serious reason unrelated to the employer or employee as referred to in the provisions of § 77.3 and § 77.5 of the act on income tax (Tuloverolaki 1535/1992). The statement determines that the lengths of time when the force majeure continues to affect taxation will depend on the duration of the Foreign Ministry’s travel restrictions to specified countries and regions.

In the current circumstances, as the pandemic continues, the Foreign Ministry revises its restrictions periodically, country by country. As a result, the Ministry’s travel restrictions may be cancelled for some countries. After that, individual travellers can again go to their destinations freely. It may be that restrictions are reinstated later if the pandemic gathers momentum in specific countries.

Although the travel restrictions to any one country may have been cancelled in Finland, the destination country can still keep its entry restrictions in effect. Moreover, the coronavirus still affects air travel significantly, and this may make it difficult for an individual employee to fly back to the destination as soon as the restrictions are cancelled. 

With travel restrictions being cancelled and reinstated, how long does the force majeure situation still affect taxation? What is the impact of entry restrictions imposed by destination countries, and what is the impact of the unavailability of flights and other travel services?

Background information

Wages and salaries received from employment abroad are not taxed in Finland if the following requirements under the provision of the act on income tax, known as the “six-month rule” (§ 77), are fulfilled: Wages received from work performed outside Finland are not subject to Finnish taxation if the employee stays in a foreign country for reasons relating to the work for an uninterrupted period of at least six months.  A further requirement is that the provisions of the tax treaty signed between the foreign country and Finland confer the primary right to tax wages on the foreign country where the work is done (or there is no tax treaty between Finland and the foreign country), and that the length of time that the employee spends in Finland does not, on average, exceed six days per month of work abroad.

The provision of the act on income tax contains an exception that refers to a situation of force majeure. It is not seen as an interruption if employee must return to Finland for a reason that is unexpected, serious, and unrelated to the employer or employee, on the condition that the employee eventually goes back to the foreign country in order to continue working outside Finland (§ 77, subsection 3).

In addition, the provisions that outline the above exception allow for the possibility that the employee must discontinue the performance of work outside Finland due to a reason characterised as unexpected, serious, and unrelated to the employee and to the employer. In this case, the individual’s income received for the work in the foreign country is not treated as subject to Finnish taxes despite the fact that his or her period of working in the foreign country turned out to be shorter than the estimated minimum time of six months (in reference to § 77.5 of the act on income).

The Tax Administration’s detailed guide on the taxation of income from work abroad (“Ulkomailla työskentelyn verotus” – record no VH/1007/00.01.00/2019 in original Finnish and Swedish), the outbreak of an epidemic disease is cited as an unexpected change in circumstances in the country where the employee works, amounting to a force majeure (section 4.2.3 of the guide).

Statement

Finland's Ministry for Foreign Affairs recommended in spring 2020 that everyone should refrain from all kinds of trips, regardless of destination. The Finnish Tax Administration’s opinion in spring 2020 was that because the coronavirus is a pandemic that extends itself to all continents, it is deemed a force majeure as referred to in § 77.3 of the act on income tax.

After the travel restrictions have eased, if an employee who had returned to Finland due to the pandemic has gone back to the foreign country to continue working there, the number of days spent in Finland may exceed the usual threshold. However, the reason for exceeding the threshold is a force majeure within the meaning of § 77.3 of the act on income tax. If an employee has come back to Finland for a vacation or work trip that had been planned earlier, and while in Finland, he or she decides not to go back to the foreign country where work is done, the extension of stay in Finland due to force majeure is deemed to start on the day when the employee should have gone back according to the original plans.

If the employee must stop working due to the pandemic before the date set out by the original plans for the work in the foreign country, the pandemic is deemed a reason characterised as unexpected, serious, and unrelated to the individual and to the employer within the meaning of § 77.5 of the act on income tax. Although the total length of time worked in a foreign country does not reach the planned six-month period (minimum length), the received wages will still be exempted from Finnish income taxes if the other requirements of the six-month rule are fulfilled during the period when the employee worked in the foreign country.

If an employee’s work in a foreign country was discontinued earlier than planned because of the pandemic, the length of time that the employee spends in Finland may have exceeded six days per month. Under the provision of § 77, subsection 3 of the act on income tax, the maximum number of days to be spent in advance in Finland is 60. If the employee’s presence in Finland has not gone over the threshold of 60 days and the other threshold based on the original work plans, the six-month rule can still be applied even if the number of days based in Finland would be excessive if calculated by the actual length of the work.

In general, the effective dates of the Foreign Ministry’s restrictions determine the periods when the force majeure affects taxation. As long as the Foreign Ministry’s general warning against travelling has concerned all countries of the world, the country where the employee has worked is not important. The length of time when the force majeure is deemed to apply is the same as the period of validity of the general warning given by the Foreign Ministry.

Later, when the general warning is no longer in effect, there may still be some countries and regions where the force majeure is deemed to apply if the Foreign Ministry maintains that those countries or regions should be avoided due to the coronavirus.

In general, the time when the Foreign Ministry cancels the restriction marks the point in time when the force majeure ceases to affect taxation. However, the foreign country itself may prevent citizens of other countries from entering; or it may be that travel tickets are not available. In those circumstances, the force majeure is still deemed to apply. Because information on any changes in travel restrictions is typically not received in an early stage, the employees’ personal arrangements, including flights and entry visas, for going back to the country where they should work may take time. For this reason, employees can only rarely go back to that country as soon as they receive word about a lifted restriction. In that case, taking account of the actual circumstances in every particular case, the date when the force majeure ceases to affect the employee’s income taxation must be deemed as being the date when they have a realistic opportunity to go back. It is the individual taxpayer’s responsibility to provide proof on when the actual circumstances no longer prevented his or her return to the country where the work is done.

However, the six-month rule can only be applied in circumstances similar to the above where the provisions of § 77.3 and § 77.5 are invoked if the country where the work is done has the right to tax the wages earned for the work done in that country. In addition, it is important to note that the tax-exemption accorded by the six-month rule does not apply to any work done in Finland because the rule only concerns work carried out in foreign countries. Accordingly, an employee’s income from work done in Finland is subject to Finnish tax (including any arrangements to work from home over a remote connection), unless the provisions of an applicable tax treaty prevent Finland from imposing tax on that income. If an employee spends a paid vacation in Finland, the income attributed to the vacation days can be exempted under the six-month rule. This requires that the vacation had been earned during a period of work in a foreign country covered by the six-month rule.

Both employers and employees must make the necessary checks in order to ascertain whether the legal provisions on the six-month rule allow for the tax exemption in circumstances where the threshold of days spent in Finland is exceeded because of various restrictions.

The coronavirus pandemic does not affect the way the tax authorities determine an individual taxpayer’s status. Tax status in Finland (resident or non-resident) is determined in accordance with the provisions found in § 9 and § 11 of the act on income tax. Likewise, the pandemic does not affect the way the tax authorities determine the country of residence for treaty purposes, the way they determine how to interpret the articles of tax treaties on employment income, or how to interpret the articles on the avoidance of double taxation. The country of residence for an individual taxpayer is determined in accordance with the treaty article on residency (i.e. article no 4 in the Model Tax Convention of the OECD). Taxing rights with respect to wages are divided between Finland and the other Contracting State of a tax treaty in accordance with the treaty article on employment income (article no 15 in the OECD Model). The way double taxation is avoided is agreed in the treaty article that sets out the method of removal of double taxation (article no 23 in the OECD Model).