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

Finland’s Ministry for Foreign Affairs has recommended that everyone should refrain from all kinds of trips. This warning was given with reference to the information issued by the World Health Organization, indicating that the Coronavirus is a pandemic. A number of countries have locked up their borders, and airline companies have either suspended their operations, or important restrictions are in effect.

Is the Coronavirus among the forces majeures within the meaning of § 77.3 of the act on income tax (Tuloverolaki 1535/1992) that make the six-month rule applicable on the tax treatment of an individual taxpayer even if he or she spends more days in Finland than the maximum number of days that can be spent in Finland under the six-month rule? Is this applicable to all countries of the world? For a Finnish wage earner who is on an assignment or job in a foreign country, if he or she must return to Finland earlier than planned because of the pandemic, is this a situation referred to in § 77.5 of the act on income tax that causes the individual wage earner to discontinue their work due to a reason characterised as compelling, serious and unrelated to the individual and to the employer?

Background information

Employment income (=wages, salary) is 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: The employment income, received from work performed outside Finland, is not subject to Finnish taxation if the wage earner 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 that there is no tax treaty), and that the length of time that the wage earner spends in Finland does not, on the 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 the wage earner must return to Finland for a reason that is unexpected, serious, and unrelated to the employer or employee, on the condition that the wage earner eventually goes to the foreign country again 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 wage earner 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, notwithstanding the fact that his or her sojourn and period of working in the foreign country turned out to be shorter than the planned minimum time – six months (in reference to § 77.5 of the income tax act).

In the detailed guidance released by the Tax Administration, Taxation of work abroad (original Finnish/Swedish guidance text has record no VH/1007/00.01.00/2019), the outbreak of an epidemic disease is cited as an unexpected change in circumstances in the country where the wage earner works, amounting to a force majeure (section 4.2.3 of the detailed guidance).

The Tax Administration’s statement

Finland’s Ministry for Foreign Affairs has recommended that everyone should refrain from all kinds of trips. This warning was given with reference to the updated information from the World Health Organization indicating that the Coronavirus is a pandemic. It is the view of the Finnish Tax Administration that as 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 income tax act.

If the pandemic makes it necessary for an individual wage earner to return to Finland for a time and he or she goes to the foreign country again later in order to pursue the work when the travel restrictions are lifted, the excess count of days spent in Finland is in such a case caused by a force majeure within the meaning of § 77.3 of the income tax act. If an individual wage earner has come back to Finland for a vacation or work trip that had been planned earlier, and while in this country, he or she decides not to go back to the foreign country where work is done, the sojourn in Finland due to force majeure is deemed to start on the day when the original plan had indicated that he or she should go back.

If the individual has to discontinue his or her work due to the pandemic before the planned end date according to the original work assignment in the foreign country, this 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. If the total length of time worked in a foreign country does not reach the planned six-month period (minimum length), it may still be that the wages received by the individual are exempted from Finnish income taxes if the other requirements of the six-month rule are fulfilled during the period when he or she worked in the foreign country.

The warning given by the Foreign Ministry against travelling concerns all countries of the world. For this reason, the country where the wage earner 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 continues to recommend that trips to those countries or regions should be avoided due to the Coronavirus.

However, the six-month rule cannot be applied in circumstances outlined above where the provisions of § 77.3 and § 77.5 are invoked unless the foreign country where the wage earner works 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. The individual wage earner’s income for this work is subject to Finnish tax (including any arrangements to work from home over a remote connection). If the wage earner has a paid vacation in Finland, the income attributed to the vacation days can be exempted under the six-month rule. This requires that the period when the vacation was earned was a period of work in a foreign country, and additionally a period covered by the six-month rule.

The employer and the wage earner 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 warnings against foreign travel.

Example 1: An employee received a foreign assignment to go to Germany and start working for a German employer starting 1 October 2019. It was planned that her assignment would end on 31 August 2020. According to the provisions of the applicable tax treaty, she is regarded as a tax resident of Finland during the entire assignment. Due to the outbreak of the coronavirus pandemic, she returns to Finland in order to continue the assignment from a location in Finland from 15 March to 31 May 2020. After 31 May, she is able to go to Germany again. She works there from 1 June to 31 August 2020. The six-month rule is applicable on the wages she receives for her work in Germany for the 1 October 2019 – 14 March 2020 period, and for 1 June 2020 – 31 August 2020 as well, if the warning given by the Foreign Ministry is in effect during the entire period she spends in Finland i.e. from 15 March to 31 May. The six-month rule applies even though, due to the pandemic, the count of days spent in Finland is higher than usual, because under the circumstances, Germany is the country that has the taxing rights on the wage income received for work done in Germany. The wages the employee receives for her work done in Finland are only taxed in Finland.

Example 2: An employee had signed an employment contract for 1 November 2019 to 31 May 2020 with his Danish employer company. However, the coronavirus pandemic caused that the employee left Denmark on 15 March 2020. He arrives in Finland in order to continue to work from a location in Finland. The employee had not visited Finland since the start of his contract with the Danish employer. Denmark has the taxing rights with respect to the wage income received for the 1 November 2019 – 15 March 2020 period. The six-month rule can apply on the tax treatment of the employee’s wages even though the period when he worked in a foreign country is shorter than six months, because the actual circumstances are as referred to in the provisions of § 77.5 of the act on income tax. The wages the employee receives during the time when he works from a location in Finland are only taxed in Finland.

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).